Uncertainty at the Zero Lower Bound
American Economic Journal: Macroeconomics, 2017, vol. 9, issue 3, 186-221
When the policy rate is at the zero lower bound (ZLB), an increase in uncertainty regarding the future path of exogenous shocks alters the conditional expectations of relevant prices facing households and firms. Accordingly, an increase in uncertainty alters consumption, inflation, and output to a greater extent when the policy rate is constrained than otherwise. Using an empirically rich sticky-price model calibrated to match key features of the US economy, I find that uncertainty can exacerbate the decline of output by about 10 percent in a deep recession that pushes the policy rate to the ZLB.
JEL-codes: E23 E31 E32 E43 E52 E58 (search for similar items in EconPapers)
Note: DOI: 10.1257/mac.20140253
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