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Uncertainty at the Zero Lower Bound

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  • Taisuke Nakata
Abstract
When the policy rate is at the zero lower bound (ZLB), an increase in uncertainty regarding the future path of exogenous shocks alters the conditional expectations of relevant prices facing households and firms. Accordingly, an increase in uncertainty alters consumption, inflation, and output to a greater extent when the policy rate is constrained than otherwise. Using an empirically rich sticky-price model calibrated to match key features of the US economy, I find that uncertainty can exacerbate the decline of output by about 10 percent in a deep recession that pushes the policy rate to the ZLB.

Suggested Citation

  • Taisuke Nakata, 2017. "Uncertainty at the Zero Lower Bound," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(3), pages 186-221, July.
  • Handle: RePEc:aea:aejmac:v:9:y:2017:i:3:p:186-221
    Note: DOI: 10.1257/mac.20140253
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    More about this item

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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