IDEAS home Printed from https://ideas.repec.org/p/red/sed017/107.html
   My bibliography  Save this paper

Risk Shocks Close to the Zero Lower Bound

Author

Listed:
  • Martin Seneca

    (Bank of England)

Abstract

Risk shocks give rise to cost-push effects in the canonical New Keynesian model if they are large relative to the distance between the nominal interest rate and its zero lower bound (ZLB). Therefore, stochastic volatility introduces occasional trade-offs for monetary policy between inflation and output gap stabilisation. The trade-off inducing effects operate through expectational responses to the interaction between perceived shock volatility and the ZLB. At the same time, a given monetary policy stance becomes less effective when risk is high. Optimal monetary policy calls for potentially sharp reductions in the interest rate when risk is elevated, even if this risk never materialises. If the underlying level of risk is high, inflation will settle potentially materially below target in a risky steady state even under optimal monetary policy.

Suggested Citation

  • Martin Seneca, 2017. "Risk Shocks Close to the Zero Lower Bound," 2017 Meeting Papers 107, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:107
    as

    Download full text from publisher

    File URL: https://economicdynamics.org/meetpapers/2017/paper_107.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. N. Bloom., 2016. "Fluctuations in uncertainty," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 4.
    2. Adam, Klaus & Billi, Roberto M., 2006. "Optimal Monetary Policy under Commitment with a Zero Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1877-1905, October.
    3. 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.
    4. Anton Nakov, 2008. "Optimal and Simple Monetary Policy Rules with Zero Floor on the Nominal Interest Rate," International Journal of Central Banking, International Journal of Central Banking, vol. 4(2), pages 73-127, June.
    5. Susanto Basu & Brent Bundick, 2017. "Uncertainty Shocks in a Model of Effective Demand," Econometrica, Econometric Society, vol. 85, pages 937-958, May.
    6. Adam, Klaus & Billi, Roberto M., 2007. "Discretionary monetary policy and the zero lower bound on nominal interest rates," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 728-752, April.
    7. 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.
    8. Giovanni Caggiano & Efrem Castelnuovo & Giovanni Pellegrino, 2018. "Estimating the Real Effects of Uncertainty Shocks at the Zero Lower Bound," "Marco Fanno" Working Papers 0222, Dipartimento di Scienze Economiche "Marco Fanno".
    9. Lukasz Rachel & Thomas Smith, 2015. "Secular Drivers of the Global Real Interest Rate," Discussion Papers 1605, Centre for Macroeconomics (CFM).
    10. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, May.
    11. Nicolas Coeurdacier & Helene Rey & Pablo Winant, 2011. "The Risky Steady State," American Economic Review, American Economic Association, vol. 101(3), pages 398-401, May.
    12. Bianca De Paoli & Pawel Zabczyk, 2013. "Cyclical Risk Aversion, Precautionary Saving, and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(1), pages 1-36, February.
    13. Olivier Blanchard & Jordi Galí, 2007. "Real Wage Rigidities and the New Keynesian Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 35-65, February.
    14. Taisuke Nakata, 2013. "Uncertainty at the zero lower bound," Finance and Economics Discussion Series 2013-09, Board of Governors of the Federal Reserve System (U.S.).
    15. Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2014. "Risk Shocks," American Economic Review, American Economic Association, vol. 104(1), pages 27-65, January.
    16. Plante, Michael D. & Richter, Alexander W. & Throckmorton, Nathaniel, 2014. "The zero lower bound and endogenous uncertainty," Working Papers 1405, Federal Reserve Bank of Dallas.
    17. Mendes, Rhys R., 2011. "Uncertainty and the Zero Lower Bound: A Theoretical Analysis," MPRA Paper 59218, University Library of Munich, Germany.
    18. repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g704ld0h3 is not listed on IDEAS
    19. Ben S. Bernanke, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 98(1), pages 85-106.
    20. Knut Are Aastveit & Gisle James Natvik & Sergio Sola, 2013. "Economic uncertainty and the effectiveness of monetary policy," Working Paper 2013/17, Norges Bank.
    21. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Giovanni Caggiano & Efrem Castelnuovo & Giovanni Pellegrino, 2018. "Estimating the Real Effects of Uncertainty Shocks at the Zero Lower Bound," "Marco Fanno" Working Papers 0222, Dipartimento di Scienze Economiche "Marco Fanno".
    2. 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.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed017:107. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann). General contact details of provider: http://edirc.repec.org/data/sedddea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.