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The zero lower bound and endogenous uncertainty

  • Plante, Michael D.

    ()

    (Federal Reserve Bank of Dallas)

  • Richter, Alexander

    ()

    (Auburn University)

  • Throckmorton, Nathaniel

    (Indiana University)

This paper documents a strong negative correlation between macroeconomic uncertainty and real GDP growth since the Great Recession. Prior to that event the correlation was weak, even when conditioning on recessions. At the same time, many central banks reduced their policy rate to its zero lower bound (ZLB), which we contend contributed to the strong correlation between macroeconomic uncertainty and real GDP growth. To test that theory, we use a model where the ZLB occasionally binds. The model roughly matches the correlation in the data—away from the ZLB the correlation is weak but strongly negative when the ZLB binds.

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Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 1405.

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Length: 20 pages
Date of creation: 21 May 2014
Date of revision:
Handle: RePEc:fip:feddwp:1405
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  1. William T. Gavin & Benjamin D. Keen & Alexander Richter & Nathaniel Throckmorton, 2013. "Global dynamics at the zero lower bound," Working Papers 2013-007, Federal Reserve Bank of St. Louis.
  2. Gust, Christopher & López-Salido, J David & Smith, Matthew E, 2012. "The Empirical Implications of the Interest-Rate Lower Bound," CEPR Discussion Papers 9214, C.E.P.R. Discussion Papers.
  3. Fernández-Villaverde, Jesús & Gordon, Grey & Guerrón-Quintana, Pablo & Rubio-Ramírez, Juan F., 2015. "Nonlinear adventures at the zero lower bound," Journal of Economic Dynamics and Control, Elsevier, vol. 57(C), pages 182-204.
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  10. Wilbur John Coleman, 1989. "Equilibrium in a production economy with an income tax," International Finance Discussion Papers 366, Board of Governors of the Federal Reserve System (U.S.).
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  13. Pinter, Gabor & Theodoridis, Konstantinos & Yates, Tony, 2013. "Risk news shocks and the business cycle," Bank of England working papers 483, Bank of England.
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  15. Alexander W. Richter & Nathaniel A. Throckmorton, 2013. "The Zero Lower Bound: Frequency, Duration, and Determinacy," Auburn Economics Working Paper Series auwp2013-16, Department of Economics, Auburn University.
  16. A. Sandmo, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Oxford University Press, vol. 37(3), pages 353-360.
  17. Todd B. Walker & Alexander W. Richter & Nathaniel A. Throckmorton, 2014. "Accuracy, Speed and Robustness of Policy Function Iteration," Auburn Economics Working Paper Series auwp2014-08, Department of Economics, Auburn University.
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  19. Mendes, Rhys R., 2011. "Uncertainty and the Zero Lower Bound: A Theoretical Analysis," MPRA Paper 59218, University Library of Munich, Germany.
  20. repec:mcb:jmoncb:v:45:y:2013:i::p:535-558 is not listed on IDEAS
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