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Time-Varying Risk Shocks and the Zero Lower Bound

Author

Listed:
  • Strobel, Johannes
  • Lee, Gabriel
  • Dorofeenko, Victor
  • Salyer, Kevin

Abstract

This paper shows that increased volatility of Örm-level productivity can push the nominal interest rate to its lower bound with large amplification effects on macroeconomic aggregates. The framework combines a simple canonical Önancial accelerator model, time varying risk shocks, and a zero lower bound on the nominal interest rate. The amplification mechanism results from a portfolio re-balancing from households, who reduce capital investment in favor of risk-free bonds. Consequently, the capital loan volume decreases which then leads to a large decline in economic activity. We show that a substantial drop in output is accompanied by small changes in ináation. We, thus, also address the "Missing Deáation Puzzle" in the Phillips Curve literature.

Suggested Citation

  • Strobel, Johannes & Lee, Gabriel & Dorofeenko, Victor & Salyer, Kevin, 2019. "Time-Varying Risk Shocks and the Zero Lower Bound," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203491, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc19:203491
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    References listed on IDEAS

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    Cited by:

    1. Toshiaki Ogawa & Masato Ubukata & Toshiaki Watanabe, 2020. "Stock Return Predictability and Variance Risk Premia around the ZLB," IMES Discussion Paper Series 20-E-09, Institute for Monetary and Economic Studies, Bank of Japan.

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    More about this item

    Keywords

    zero lower bound; credit channel; time-varying risk shocks; missing deáation puzzle; monetary policy;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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