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.
"Uncertainty at the Zero Lower Bound."
American Economic Journal: Macroeconomics,
Price Level; Inflation; Deflation
Business Fluctuations; Cycles
Interest Rates: Determination, Term Structure, and Effects
Central Banks and Their Policies