Uncertainty Shocks, Innovation, and Productivity

Dario Bonciani and Joonseok Oh

The B.E. Journal of Macroeconomics, 2023, vol. 23, issue 1, 279-335

Abstract: In this paper, we argue that macroeconomic uncertainty shocks cause a persistent decline in economic activity, investment in R&D, and total factor productivity. After providing empirical evidence, we build a DSGE model with sticky prices and endogenous growth through investment in R&D. In this framework, uncertainty shocks lead to a short-term fall in demand because of precautionary savings and rising markups. The reduction in the utilised aggregate stock of R&D determines a fall in productivity, which causes a long-term reduction 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 severely exacerbates the precautionary savings motive and the overall adverse effects of uncertainty shocks.

Keywords: uncertainty shocks; R&D; total factor productivity; endogenous growth (search for similar items in EconPapers)
JEL-codes: E32 O40 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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DOI: 10.1515/bejm-2021-0074

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