Endogenous Volatility at the Zero Lower Bound: Implications for Stabilization Policy
53 Pages Posted: 28 Jun 2015
Date Written: January 1, 2015
At the zero lower bound, the central bank’s inability to oﬀset shocks endogenously generates volatility. In this setting, an increase in uncertainty about future shocks causes signiﬁcant contractions in the economy and may lead to non-existence of an equilibrium. The form of the monetary policy rule is crucial for avoiding catastrophic outcomes. State-contingent optimal monetary and ﬁscal policies can attenuate this endogenous volatility by stabilizing the distribution of future outcomes. Fluctuations in uncertainty and the zero lower bound help our model match the unconditional and stochastic volatility in the recent macroeconomic data.
Keywords: Endogenous Volatility, Zero Lower Bound, Optimal Stabilization Policy
JEL Classification: E32, E52
Suggested Citation: Suggested Citation