The Zero Lower Bound and Endogenous Uncertainty

June 9th, 2014
in econ_news

from the Dallas Fed

There is significant interest in understanding the relationship between uncertainty and economic activity. Several papers have found a negative relationship between macroeconomic uncertainty and economic activity in the data. For example, Bloom (2009) shows that unexpected increases in uncertainty, given by stock price volatility, are associated with declines in industrial production in a vector autoregression. Bekaert et al. (2013) and Pinter et al. (2013) find similar relationships.

Follow up:

This paper documents there is a strong negative relationship between macroeconomic uncertainty and real GDP growth since the Great Recession. Prior to that event, the correlation between those two variables was weak, even when conditioning on quarters when the economy was in a recession. Why does the Great Recession lead to a stronger negative correlation compared to previous recessions?

[click on image to read this study]


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