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Federal Reserve Bank of Dallas
Working Papers
The zero lower bound and endogenous uncertainty
Michael D. Plante
Alexander W. Richter
Nathaniel Throckmorton
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.


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Michael D. Plante & Alexander W. Richter & Nathaniel Throckmorton, The zero lower bound and endogenous uncertainty, Federal Reserve Bank of Dallas, Working Papers 1405, 21 May 2014.
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Keywords: monetary policy; uncertainty; economic activity; zero lower bound
DOI: 10.24149/wp1405
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