Uncertainty shocks are aggregate demand shocks

Sylvain Leduc and Zheng Liu

Journal of Monetary Economics, 2016, vol. 82, issue C, 20-35

Abstract: Search frictions in the labor market give rise to a new option-value channel through which uncertainty affects aggregate economic activity, and the effects of which are reinforced by the presence of nominal rigidities. With these features, an increase in uncertainty resembles an aggregate demand shock because it increases unemployment and lowers inflation. Using a new empirical measure of uncertainty based on the Michigan survey and a VAR model, we show that these theoretical patterns are consistent with US data. Using a calibrated DSGE model, we show that combining search frictions and nominal rigidities can match the qualitative VAR pattern and account for about 70percent of the empirical increase in unemployment following an uncertainty shock.

Keywords: E21; E32; J64; Uncertainty; Aggregate demand; Labor search frictions; Option-value channel; Unemployment (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (493)

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Related works:
Working Paper: Uncertainty Shocks Are Aggregate Demand Shocks (2013)
Working Paper: Uncertainty shocks are aggregate demand shocks (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:82:y:2016:i:c:p:20-35

DOI: 10.1016/j.jmoneco.2016.07.002

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