In no uncertain terms: The effect of uncertainty on credit frictions and monetary policy

Nathan Balke, Enrique Martínez-García and Zheng Zeng
Authors registered in the RePEc Author Service: Enrique Martínez García ()

Economic Modelling, 2021, vol. 100, issue C

Abstract: We examine the interaction of uncertainty and credit frictions in a New Keynesian framework. The model considers credit frictions arising from costly-state verification in the provision of loans to fund the acquisition of capital by entrepreneurs and includes three types of time-varying stochastic volatility shocks related to monetary policy uncertainty, financial risk (micro uncertainty), and macro uncertainty. Key parameters are estimated by the simulated method of moments using data from the United States from 1984:Q1 until 2014:Q4. We find that (1) micro uncertainty has first-order effects that are significantly larger than the effects of macro uncertainty and monetary policy uncertainty; (2) poor credit conditions exacerbate the economic drag from micro uncertainty shocks, amplify the effects of monetary policy shocks, and mitigate the impact of total factor productivity (TFP) shocks; (3) a degree of asymmetry and nonscalability appears in response to monetary policy shocks depending on the degree of nominal rigidities and initial conditions; and (4) monetary policy uncertainty accounts for about one-third of business cycle volatility largely by affecting the size of monetary policy shocks.

Keywords: Financial accelerator; Stochastic volatility; Monetary policy transmission; Nominal rigidities; Perturbation methods (search for similar items in EconPapers)
JEL-codes: C32 D8 E32 E44 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:100:y:2021:i:c:s0264999321000766

DOI: 10.1016/j.econmod.2021.03.012

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