Why does risk matter more in recessions than in expansions?

Martin Møller Andreasen, Giovanni Caggiano, Efrem Castelnuovo and Giovanni Pellegrino

No 13/2021, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: This paper uses a nonlinear vector autoregression and a non-recursive identiÖcation strategy to show that an equal-sized uncertainty shock generates a larger contraction in real activity when growth is low (as in recessions) than when growth is high (as in expansions). An estimated New Keynesian model with recursive preferences and approximated to third order around its risky steady state replicates these state-dependent responses. The key mechanism behind this result is that Örms display a stronger upward nominal pricing bias in recessions than in expansions, because recessions imply higher ináation volatility and higher marginal utility of consumption than expansions.

Keywords: New Keynesian Model; Nonlinear SVAR; Non-recursive identiÖcation; State-dependent uncertainty shock; Risky steady state (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-dge, nep-rmg and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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https://www.econstor.eu/bitstream/10419/249593/1/BoF-DP-2113.pdf (application/pdf)

Related works:
Working Paper: Why Does Risk Matter More in Recessions than in Expansions? (2021)
Working Paper: Why Does Risk Matter More in Recessions than in Expansions? (2021)
Working Paper: Why does risk matter more in recessions than in expansions? (2021)
Working Paper: Why Does Risk Matter More in Recessions than in Expansions? (2021)
Working Paper: Why Does Risk Matter More in Recessions than in Expansions? (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:rdp2021_013

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