Uncertainty Shocks in a Model of Effective Demand
By S. Basu, Brent H. Bundick. 2011
867 citations recorded by the source corpus.
This paper examines the role of uncertainty shocks in a one-sector, representative-agent dynamic stochastic general equilibrium model. When prices are flexible, uncertainty shocks are not capable of producing business cycle co-movements among key macro variables. With countercyclical markups through sticky prices, however, uncertainty shocks can generate fluctuations that are consistent with business cycles. Monetary policy usually plays a key role in offsetting 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 effects on the economy. Calibrating the size of uncertainty shocks using fluctuations in the VIX, the authors find that increased uncertainty about the future may indeed have played a significant role in worsening the Great Recession, which is consistent with statements by policymakers, economists, and the financial press.
Subfields: Economics and Econometrics
View Paper: https://www.semanticscholar.org/paper/119f1e378d42838583feb48670b872664299fea4
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Citations in the corpus
- A shadow rate New Keynesian model (2016, neutral): “We then show unconventional monetary policy has identical 1For empirical studies, see, Basu and Bundick (2012), Nikolsko-Rzhevskyy et al. (2014), Aizenman et al. (2016), and Aastveit et al. (2017).”
- Collateral Constraints and Macroeconomic Asymmetries (2013, neutral): “(2011) and Basu and Bundick (2017) , the presence of the ZLB creates an additional, important nonlinearity.”
- Uncertainty and Business Cycles: Exogenous Impulse or Endogenous Response? (2015, neutral): “This includes models of the real options effects of uncertainty (Bernanke (1983), McDonald and Siegel (1986)), models in which uncertainty influences financing constraints (Gilchrist, Sim, and Zakrajsek (2010), Arellano, Bai, and Kehoe (2011)), or precautionary saving (Basu and Bundick (2017), Leduc”
- Uncertainty Shocks, Asset Supply and Pricing over the Business Cycle (2018, neutral): “In practice one would expect it to reflect a drop in the labor productivity of management or other employees not directly related to increasing the scale of production (such as the legal or human resources department).”
- Uncertainty and Economic Activity: Evidence from Business Survey Data (2013, neutral): “Basu and Bundick (2011) study uncertainty shocks in a sticky price environment.”
- Escaping the Great Recession (2017, neutral): “See Benhabib et al. (2001, 2002), Mertens and Ravn (2014), Fernandez-Villaverde, Gordon, et al. (2015), Fernandez-Villaverde et al. (2014), Coibion et al. (2012), Werning (2012), Correia et al. (2013), Gust et al. (2013), Aruoba and Schorfheide (2013).”
- Uncertainty at the zero lower bound (2017, neutral): “See Basu and Bundick (2012) and Gordon, Fernndez-Villaverde, Guerrn-Quintana, and Rubio-Ramirez (2012). However, none of the papers compares the decision rules in the stochastic economy with those in the deterministic economy.”
- The Impact of Brexit on UK Firms (2019, neutral): “First is the literature on uncertainty, for example, Bernanke (1983), Dixit and Pindyck (1994), Fernandez-Villaverde et al.”