The Zero Lower Bound and Endogenous Uncertainty

This article examines the correlation between uncertainty and real GDP growth. We use the volatility of real GDP growth from a VAR, stock market volatility, survey‐based forecast dispersion and macro uncertainty index as proxies for uncertainty. In each case, a stronger negative correlation emerged in 2008. We contend the zero lower bound (ZLB) on the federal funds rate contributed to our finding. To test our theory, we estimate a New Keynesian model with a ZLB constraint to generate a data‐driven, forward‐looking uncertainty measure. The correlations between that measure and real GDP growth are close to the values in the data.