When It Rains It Pours: Cascading Uncertainty Shocks

Anthony M. Diercks, Alex Hsu and Andrea Tamoni

Journal of Political Economy, 2024, vol. 132, issue 2, 694 - 720

Abstract: The effects of uncertainty shocks are superadditive. On the basis of local projections, we find that the combination of nearby positive shocks can be multiple times more powerful than the sum of their stand-alone effects. In a standard New Keynesian dynamic stochastic general equilibrium model, uncertainty shocks are proven to be superadditive only when the model is solved under fourth- (or higher-)order perturbation. The fourth-order solution unlocks the fourth derivative of marginal utility, “edginess,” which is key to generating stronger reactions to multiple risks and superadditivity. Intuitively, an agent already bearing one risk is less willing to bear another in the presence of edginess.

Date: 2024
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://dx.doi.org/10.1086/726705 (application/pdf)
http://dx.doi.org/10.1086/726705 (text/html)
Access to the online full text or PDF requires a subscription.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ucp:jpolec:doi:10.1086/726705

Access Statistics for this article

More articles in Journal of Political Economy from University of Chicago Press
Bibliographic data for series maintained by Journals Division ().