The Zero Lower Bound and Endogenous Uncertainty

The Economic Journal

25 Pages Posted: 20 Jun 2014 Last revised: 11 Oct 2016

Michael Plante

Federal Reserve Bank of Dallas; Indiana University Bloomington - Center for Applied Economics and Policy Research

Alexander W. Richter

Federal Reserve Bank of Dallas

Nathaniel A. Throckmorton

College of William and Mary

Date Written: September 10, 2016

Abstract

This paper 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 the index from Jurado et al. (2015) 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.

Keywords: Bayesian Estimation; Monetary Policy; Uncertainty; Zero Lower Bound

JEL Classification: C11; E43; E58

Suggested Citation

Plante, Michael and Richter, Alexander W. and Throckmorton, Nathaniel A., The Zero Lower Bound and Endogenous Uncertainty (September 10, 2016). The Economic Journal. Available at SSRN: https://ssrn.com/abstract=2456425 or http://dx.doi.org/10.2139/ssrn.2456425

Michael D. Plante (Contact Author)

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Indiana University Bloomington - Center for Applied Economics and Policy Research ( email )

100 South Woodlawn Avenue, Wylie Hall 250
Bloomington, IN 47405-1704
United States

Alexander W. Richter

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5360 (Phone)

HOME PAGE: http://alexrichterecon.com

Nathaniel A. Throckmorton

College of William and Mary ( email )

P.O. Box 8795
Williamsburg, VA 23187
United States

HOME PAGE: http://nathrockmorton.people.wm.edu/

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