The long-run effects of uncertainty shocks

Dario Bonciani and Joonseok Oh

No 802, Bank of England working papers from Bank of England

Abstract: This paper argues that shocks increasing macroeconomic uncertainty negatively affect economic activity not only in the short but also in the long run. In a sticky-price DSGE model with endogenous growth through investment in R&D, uncertainty shocks lead to a short-term fall in demand because of precautionary savings and rising markups. The decline in the utilised aggregate stock of R&D determines a fall in productivity, which causes a long-term decline in the main macroeconomic aggregates. When households feature Epstein-Zin preferences, they become averse to these long-term risks affecting their consumption process (long-run risk channel), which strongly exacerbates the precautionary savings motive and the overall negative effects of uncertainty shocks.

Keywords: Uncertainty shocks; R&D; endogenous growth (search for similar items in EconPapers)
JEL-codes: E32 O40 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2019-06-07
New Economics Papers: this item is included in nep-dge, nep-gro, nep-mac and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://www.bankofengland.co.uk/-/media/boe/files/ ... certainty-shocks.pdf Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0802

Access Statistics for this paper

More papers in Bank of England working papers from Bank of England Bank of England, Threadneedle Street, London, EC2R 8AH. Contact information at EDIRC.
Bibliographic data for series maintained by Digital Media Team ().