Uncertainty at the zero lower bound

Taisuke Nakata

No 2013-09, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper examines how the presence of uncertainty alters allocations and prices when the nominal interest rate is constrained by the zero lower bound. I conduct the analysis using a standard New Keynesian model in which the nominal interest rate is determined according to a truncated Taylor rule. I find that an increase in the variance of shocks to the discount factor process reduces consumption, inflation, and output by a substantially larger amount when the zero lower bound is binding than when it is not. Due to the zero lower bound constraint, policy functions for the real interest rates and the marginal costs of production are highly convex and concave, respectively. As a result, a mean-preserving spread in the shock distribution increases the expectation of future real interest rates and decreases the expectation of future real marginal costs, which lead forward-looking households and firms to reduce consumption and set lower prices today. The more flexible prices are, the larger the effects of uncertainty are at the zero lower bound.

Date: 2013
New Economics Papers: this item is included in nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.federalreserve.gov/pubs/feds/2013/201309/201309abs.html (text/html)
http://www.federalreserve.gov/pubs/feds/2013/201309/201309pap.pdf (application/pdf)

Related works:
Journal Article: Uncertainty at the Zero Lower Bound (2017)
Working Paper: Uncertainty at the Zero Lower Bound (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2013-09

Access Statistics for this paper

More papers in Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().