Endogenous Volatility at the Zero Lower Bound: Implications for Stabilization Policy

53 Pages Posted: 22 Nov 2015

See all articles by Susanto Basu

Susanto Basu

Boston College, College of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Brent Bundick

Federal Reserve Bank of Kansas City

Multiple version iconThere are 3 versions of this paper

Date Written: January 1, 2015

Abstract

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

Basu, Susanto and Bundick, Brent, Endogenous Volatility at the Zero Lower Bound: Implications for Stabilization Policy (January 1, 2015). Federal Reserve Bank of Kansas City Working Paper No. 15-01, Available at SSRN: https://ssrn.com/abstract=2693735 or http://dx.doi.org/10.2139/ssrn.2693735

Susanto Basu

Boston College, College of Arts and Sciences, Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467-3806
United States
617-552-2308 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Brent Bundick (Contact Author)

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States

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