The Zero Lower Bound and Endogenous Uncertainty

Plante, Michael; Richter, Alexander W.; Throckmorton, Nathaniel A.

doi:10.1111/ecoj.12445

Cited by 54 publications

(20 citation statements)

References 84 publications

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“…3.2 UNEMPLOYMENT UNCERTAINTY An advantage of our nonlinear approach is that we can study how shocks to the first moments of exogenous variables induce changes in the higher order moments of endogenous variables. Given our application, we focus on the uncertainty surrounding the unemployment rate, which we measure as the expected volatility of the 1-period ahead forecast error following Plante et al (2018). Specifically, for a generic variable x, uncertainty is given by…”

Section: Analytical Resultsmentioning

confidence: 99%

COVID-19: A View from the Labor Market

Bernstein

Richter

Throckmorton

2020

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This paper examines the response of the U.S. labor market to a large and persistent job separation rate shock, motivated by the ongoing economic effects of the COVID-19 pandemic. We use nonlinear methods to analytically and numerically characterize the responses of vacancy creation and unemployment. Vacancies decline in response to the shock when firms expect persistent job destruction and the number of unemployed searching for work is low. Quantitatively, under our baseline forecast the unemployment rate peaks at 19.7%, 2 months after the shock, and takes 1 year to return to 5%. Relative to a scenario without the shock, unemployment uncertainty rises by a factor of 11. Nonlinear methods are crucial. In the linear economy, the unemployment rate "only" rises to 9.2%, vacancies increase, and uncertainty is unaffected. In both cases, the severity of the COVID-19 shock depends on the separation rate persistence.

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Section: Analytical Resultsmentioning

confidence: 99%

COVID-19: A View from the Labor Market

Bernstein

Richter

Throckmorton

2020

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“…This section develops some understanding for how uncertainty behaves in dynamic models using simplified settings that permit analytical solutions. Following Plante et al (2018), macroeconomic uncertainty in our model is defined as the expected volatility of a variable in the model. The same definition is also used in empirical work on uncertainty (e.g., Jurado et al 2015).…”

Section: Analytical Resultsmentioning

confidence: 99%

“…One segment emphasizes the role of a financial sector under complete information, where the severity and duration of financial crises are stochastic. Most papers focus on crises that result from financial frictions, collateral constraints, or the zero lower bound constraint on the short-term nominal interest rate (Brunnermeier and Sannikov, 2014;He and Krishnamurthy, 2019;Mendoza, 2010;Plante et al, 2018), while others in this area incorporate the role of firm default (Arellano et al, 2019;Gourio, 2014;Navarro, 2014). A separate segment of the literature examines the implications of incomplete information.…”

Section: Introductionmentioning

confidence: 99%

Complementarity and Macroeconomic Uncertainty

Atkinson¹,

Plante

Richter

et al. 2020

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Macroeconomic uncertainty-the conditional volatility of the unforecastable component of a future value of a time series-shows considerable variation in the data. A typical assumption in business cycle models is that production is Cobb-Douglas. Under that assumption, this paper shows there is usually little, if any, endogenous variation in output uncertainty, and first moment shocks have similar effects in all states of the economy. When the model departs from Cobb-Douglas production and assumes capital and labor are gross complements, first-moment shocks have state-dependent effects and can cause meaningful variation in uncertainty compared to the data. Estimating several variants of a nonlinear real business cycle model reveals the data strongly prefers a model with high complementarity between capital and labor inputs.

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“…Empirical studies that estimate nonlinear DSGE models with the zero lower bound are still scarce. Remarkable exceptions are Iiboshi et al (2008), Richter and Throckmorton (2016), Gust et al (2017), and Plante et al (2018). These authors estimate fully nonlinear New Keynesian models in which the interest-rate lower bound is occasionally binding for the US or Japanese economy.…”

Section: Notesmentioning

confidence: 99%

An Estimated Dsge Model With a Deflation Steady State

Hirose

2018

Macroecon. Dynam.

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Benhabib et al. [(2001) Journal of Economic Theory 96, 40–69] argue that there exists a deflation steady state when the zero lower bound on the nominal interest rate is considered in a Taylor-type monetary policy rule. This paper estimates a medium-scale DSGE model with a deflation steady state for the Japanese economy during the period from 1999 to 2013, when the Bank of Japan conducted a zero interest rate policy and the inflation rate was almost always negative. Although the model exhibits equilibrium indeterminacy around the deflation steady state, a set of specific equilibria is selected by Bayesian methods. According to the estimated model, positive shocks to households’ preferences and wage markup, and a negative shock to monetary policy do not necessarily have an inflationary effect, in contrast to a standard model with a targeted-inflation steady state. An economy in the deflation equilibrium could experience unexpected volatility because of sunspot fluctuations, but it turns out that sunspot shocks have a limited effect on Japan’s output fluctuations and rather contribute to stabilizing the economy after the global financial crisis.

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The Zero Lower Bound and Endogenous Uncertainty

Cited by 54 publications

References 84 publications

COVID-19: A View from the Labor Market

COVID-19: A View from the Labor Market

Complementarity and Macroeconomic Uncertainty

An Estimated Dsge Model With a Deflation Steady State

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