Econometrica· 2017Q1
Uncertainty Shocks in a Model of Effective Demand
- 809citations
- Q1SCImago
- 2017year
Short summary
Uncertainty shocks can generate business cycle fluctuations with sticky prices and countercyclical markups, a mechanism absent when prices are flexible.
AI-generated from the title and abstract; the full text is not read.
Key points
- Uncertainty shocks only generate business cycle comovements when prices are sticky and markups are countercyclical.
- Flexible prices render uncertainty shocks incapable of producing business cycle comovements.
- Zero lower bound constraints on monetary policy exacerbate the negative impact of uncertainty shocks.
- Calibrated uncertainty shocks, using VIX fluctuations, suggest a significant role in worsening the Great Recession.
AI-generated from the title and abstract; the full text is not read.
Abstract
This paper examines the role of uncertainty shocks in a one-sector, representative-agent dynamic stochastic general-equilibrium model. When prices are exible, uncertainty shocks are not capable of producing business-cycle comovements among key macro variables. With countercyclical markups through sticky prices, however, uncertainty shocks can generate uctuations that are consistent with business cycles. Monetary policy usually plays a key role in osetting the negative impact of uncertainty shocks. If the central bank is constrained by the zero lower bound, then monetary policy can no longer perform its usual stabilizing function and higher uncertainty has even more negative eects on the economy. Calibrating the size of uncertainty shocks using uctuations in the VIX, we nd that increased uncertainty about the future may indeed have played a signicant role in worsening the Great Recession, which is consistent with statements by policymakers, economists, and the nancial press.
The authors' abstract, as published at the source. Econometrica, 2017 · DOI ↗
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Field: General Economics, Econometrics and Finance
General Economics, Econometrics and FinanceEconomics, Econometrics and Finance