Uncertainty shocks are aggregate demand shocks
Sylvain Leduc and
Zheng Liu
No 2012-10, Working Paper Series from Federal Reserve Bank of San Francisco
Abstract:
We study the macroeconomic effects of uncertainty shocks in a DSGE model with labor search frictions and sticky prices. In contrast to a real business cycle model, the model with search frictions implies that uncertainty shocks reduce potential output, because a job match represents a long-term employment relation and heightened uncertainty reduces the value of a match. In the sticky-price equilibrium, an uncertainty shock--regardless of its source--consistently acts like an aggregate demand shock because it raises unemployment and lowers inflation. We present empirical evidence--based on a vector autoregression model and using a few alternative measures of uncertainty--that supports the theory's prediction that uncertainty shocks are aggregate demand shocks.
Keywords: Uncertainty; Inflation (Finance); Unemployment (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
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