The Zero Lower Bound and Endogenous Uncertainty
The Economic Journal
25 Pages Posted: 20 Jun 2014 Last revised: 11 Oct 2016
Date Written: September 10, 2016
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: Suggested Citation