The Zero Lower Bound and Endogenous Uncertainty

Michael Plante, Alexander Richter and Nathaniel Throckmorton

Economic Journal, 2018, vol. 128, issue 611, 1730-1757

Abstract: This article examines the correlation between uncertainty and real GDP growth. We use the volatility of real GDP growth from a VAR, stock market volatility, survey†based forecast dispersion and macro uncertainty index as proxies for uncertainty. In each case, a stronger negative correlation emerged in 2008. We contend the zero lower bound (ZLB) on the federal funds rate contributed to our finding. To test our theory, we estimate a New Keynesian model with a ZLB constraint to generate a data†driven, forward†looking uncertainty measure. The correlations between that measure and real GDP growth are close to the values in the data.

Date: 2018
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https://doi.org/10.1111/ecoj.12445

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Working Paper: The zero lower bound and endogenous uncertainty (2014)
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