 Uncertainty shocks in a model with mean-variance frontiers and endogenous technology choicesJournal of Macroeconomics, 2016, vol. 49, issue C, 71-98 Abstract: This paper builds a model to show how increases in aggregate uncertainty – an uncertainty shock – can generate recessions. Uncertainty shocks in the model are able to both account for a significant portion of business cycle fluctuations observed in data and generate positive comovements between output, consumption, investment, and hours. The key assumption of the model is that firm managers endogenously choose what projects to undertake and that the menu of these projects lies on a positively sloped mean-variance frontier – high-return projects are also high-risk projects. In times of high aggregate uncertainty, managers choose to undertake low-risk projects, and thus low-return projects, which in turn leads to a recession. Moreover, the model also matches various stylized facts about time series and cross-sectional variations in TFP and suggests shortcomings in using TFP data to calculate exogenous TFP shocks. Keywords: Business cycles; Uncertainty shocks (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:49:y:2016:i:c:p:71-98 DOI: 10.1016/j.jmacro.2016.05.001 Access Statistics for this article Journal of Macroeconomics is currently edited by Douglas McMillin and Theodore Palivos More articles in Journal of Macroeconomics from Elsevier |
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