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

No 21838, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E32 E52 (search for similar items in EconPapers)
Date: 2015-12
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
Note: EFG ME
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Working Paper: Endogenous volatility at the zero lower bound: implications for stabilization policy (2015)
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