ZLB magnifies impacts of uncertainty shocks, paper says
Differences caused by zero lower bound are “economically important”, researchers say
A working paper from the Bank of Finland examines whether shocks to uncertainty have greater real effects when the economy is at the zero lower bound, or ZLB.
In Estimating the real effects of uncertainty shocks at the zero lower bound, Giovanni Caggiano, Efrem Castelnuovo and Giovanni Pellegrino use a parsimonious non-linear iInteracted vector autoregression model.
The authors find that the contractionary effects of shocks to uncertainty are "statistically larger when the ZLB is binding, with
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