RWP 15-01, January 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.
JEL Classification: E32, E52
- Basu, Susanto, and Brent Bundick. 2015. “Endogenous Volatility at the Zero Lower Bound: Implications for Stabilization Policy,” Federal Reserve Bank of Kansas City, working paper no. 15-1, January. Available at External Linkhttps://doi.org/10.18651/RWP2015-01
- Basu, Susanto, and Brent Bundick. 2015. External Link“Uncertainty Shocks in a Model of Effective Demand,” Federal Reserve Bank of Kansas City, working paper no. 14-15, November.
- Plante, Michael, Alexander W. Richter and Nathaniel A. Throckmorton. 2014. External Link“The Zero Lower Bound and Endogenous Uncertainty,” Federal Reserve Bank of Dallas, working paper no. 1405, May.
- Evans, Charles, Jonas Fisher, Francois Gourio, and Spencer Krane. 2015. External Link“Risk Management for Monetary Policy at the Zero Lower Bound,” Brookings Papers on Economic Activity, March.