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Are uncertainty shocks aggregate demand shocks?

Stefano Fasani () and Lorenza Rossi ()

Economics Letters, 2018, vol. 167, issue C, 142-146

Abstract: This note considers the Leduc and Liu (JME, 2016) model and studies the effects of their uncertainty shock under different Taylor-type rules. It shows that both the responses of real and nominal variables highly depend on the Taylor rule considered. Remarkably, inflation reacts positively so that uncertainty shocks look more like negative supply shocks, once an empirically plausible degree of interest rate smoothing is taken into account. This result is reinforced with less reactive monetary rules. Overall, these rules alleviate the recession.

Keywords: Uncertainty shocks; DSGE model; Search and matching frictions; Taylor rules; Inflation dynamics (search for similar items in EconPapers)
JEL-codes: E12 E21 E22 E24 E31 C32 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Are Uncertainty Shocks Aggregate Demand Shocks? (2018) Downloads
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