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Endogenous volatility at the zero lower bound: implications for stabilization policy


  • Basu, Susanto
  • Bundick, Brent

    () (Federal Reserve Bank of Kansas City)


At the zero lower bound, the central bank's inability to offset shocks endogenously generates volatility. In this setting, an increase in uncertainty about future shocks causes significant contractions in the economy and may lead to non-existence of an equilibrium. The form of the monetary policy rule is crucial for avoiding catastrophic outcomes. State-contingent optimal monetary and fiscal policies can attenuate this endogenous volatility by stabilizing the distribution of future outcomes. Fluctuations in uncertainty and the zero lower bound help our model match the unconditional and stochastic volatility in the recent macroeconomic data.

Suggested Citation

  • Basu, Susanto & Bundick, Brent, 2015. "Endogenous volatility at the zero lower bound: implications for stabilization policy," Research Working Paper RWP 15-1, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:rwp15-01

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    Cited by:

    1. Seneca, Martin, 2016. "Risk shocks close to the zero lower bound," Bank of England working papers 606, Bank of England.
    2. Arias, Jonas E. & Erceg, Christopher & Trabandt, Mathias, 2016. "The macroeconomic risks of undesirably low inflation," European Economic Review, Elsevier, vol. 88(C), pages 88-107.
    3. Holden, Tom D., 2016. "Existence, uniqueness and computation of solutions to dynamic models with occasionally binding constraints," EconStor Preprints 127430, ZBW - German National Library of Economics.
    4. repec:eee:eecrev:v:100:y:2017:i:c:p:257-272 is not listed on IDEAS
    5. Caggiano, Giovanni & Castelnuovo, Efrem & Pellegrino, Giovanni, 2017. "Estimating the real effects of uncertainty shocks at the Zero Lower Bound," European Economic Review, Elsevier, vol. 100(C), pages 257-272.
    6. Holden, Thomas, 2016. "Existence and uniqueness of solutions to dynamic models with occasionally binding constraints," EconStor Preprints 130142, ZBW - German National Library of Economics.
    7. Isabel Cairo & Jae Sim, 2017. "Income Inequality, Financial Crises and Monetary Policy," 2017 Meeting Papers 1433, Society for Economic Dynamics.

    More about this item


    Endogenous volatility; Zero lower bound; Optimal stabilization policy;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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