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The Zero Lower Bound and Endogenous Uncertainty

Plante, Michael
; 
Richter, Alexander W.
; 
Abstract
This article 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 macro uncertainty index 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.
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2018
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The Economic Journal
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Economics
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PRT_Uncertainty.pdf
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Plante, M., Richter, A.W. and Throckmorton, N.A. (2018), The Zero Lower Bound and Endogenous Uncertainty. Econ J, 128: 1730-1757. https://doi.org/10.1111/ecoj.12445
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https://doi.org/10.1111/ecoj.12445
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https://scholarworks.wm.edu/handle/internal/19628
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