Uncertainty Shocks in a Model of Effective Demand: Reply

Susanto Basu and Brent Bundick

Econometrica, 2018, vol. 86, issue 4, 1527-1531

Abstract: de Groot, Richter, and Throckmorton, 2018 argue that the model in Basu and Bundick, 2017 can match the empirical evidence only because the model assumes an asymptote in the economy's response to an uncertainty shock. In this Reply, we provide new results showing that our model's ability to match the data does not rely either on assuming preferences that imply an asymptote nor on a particular value of the intertemporal elasticity of substitution. We demonstrate that shifting to preferences that are not vulnerable to the Comment's critique does not change our previous conclusions about the propagation of uncertainty shocks to macroeconomic outcomes.

Date: 2018
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