Macroeconomic Effects of Financial Uncertainty

Grzegorz Długoszek

VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy from Verein für Socialpolitik / German Economic Association

Abstract: This paper investigates the macroeconomic effects of uncertainty originating in the financial sector. My contribution is twofold. First, I document empirical relevenace of financial uncertainty using SVAR methods. Then, I employ the DSGE framework developed by Gertler and Karadi (2011) to uncover the underlying transmission mechanism. The model generates macroeconomic dynamics that are consistent with the SVAR evidence. In particular, an increase in financial uncertainty raises the risk premium and leads to a decline in output, consumption, investment and hours worked. This outcome arises mainly because of an endogenous tightening of the financial constraint, which in turn triggers the financial accelerator mechanism. Finally, internal habit formation and nominal rigidities act as additional amplification mechanisms for financial uncertainty shocks.

Keywords: Stochastic Volatility; Financial Frictions; Financial Uncertainty (search for similar items in EconPapers)
JEL-codes: E21 E32 E44 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-mac
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https://www.econstor.eu/bitstream/10419/181596/1/VfS-2018-pid-13793.pdf (application/pdf)

Related works:
Working Paper: Macroeconomic Effects of Financial Uncertainty (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc18:181596

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