The zero lower bound and endogenous uncertainty

RePEc Short ID: ppl48
ORCID iD: 0000-0003-0604-105X

Plante, Michael D.; Richter, Alexander W.; Throckmorton, Nathaniel A.

doi:10.24149/wp1405

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

JEL Classification: E32; E47; E58;

https://doi.org/10.24149/wp1405