
This paper introduces a business cycle model that integrates financial markets and endogenous financial volatility at the Zero Lower Bound (ZLB). We derive three key insights: first, central banks can mitigate excess financial volatility at the ZLB by credibly committing to future economic stabilization; second, a commitment to refraining from future stabilization can steer the economy toward more favorable equilibrium paths, thereby revealing a trade-off between future stabilization and reduced financial volatility at the ZLB; third, maintaining uncertainty regarding the timing of future stabilization is strictly superior to alternative forward guidance commitments.
risk premium, ddc:330, financial volatility, monetary policy, E44, forward guidance, E62, E52, E32, E43
risk premium, ddc:330, financial volatility, monetary policy, E44, forward guidance, E62, E52, E32, E43
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