Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/325025 
Year of Publication: 
2025
Series/Report no.: 
CESifo Working Paper No. 12034
Publisher: 
CESifo GmbH, Munich
Abstract: 
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.
Subjects: 
monetary policy
forward guidance
financial volatility
risk premium
JEL: 
E32
E43
E44
E52
E62
Document Type: 
Working Paper
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