Uncertainty at the zero lower bound
T Nakata - American Economic Journal: Macroeconomics, 2017 - aeaweb.org
American Economic Journal: Macroeconomics, 2017•aeaweb.org
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 …
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 …
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. (JEL E23, E31, E32, E43, E52, E58)
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