Working Paper

The zero lower bound and endogenous uncertainty


Abstract: 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.

Keywords: economic activity; uncertainty; monetary policy; zero lower bound;

JEL Classification: E32; E47; E58;

https://doi.org/10.24149/wp1405

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Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Working Papers

Publication Date: 2014-05-21

Number: 1405

Pages: 20 pages