The Interaction Between Credit Constraints and Uncertainty Shocks
David Gunawan and
Papers from arXiv.org
Can uncertainty about credit availability trigger a slowdown in real activity? This question is answered by using a novel method to identify shocks to uncertainty in access to credit. Time-variation in uncertainty about credit availability is estimated using particle Markov Chain Monte Carlo. We extract shocks to time-varying credit uncertainty and decompose it into two parts: the first captures the "pure" effect of a shock to the second moment; the second captures total effects of uncertainty including effects on the first moment. Using state-dependent local projections, we find that the "pure" effect by itself generates a sharp slowdown in real activity and the effects are largely countercyclical. We feed the estimated shocks into a flexible price real business cycle model with a collateral constraint and show that when the collateral constraint binds, an uncertainty shock about credit access is recessionary leading to a simultaneous decline in consumption, investment, and output.
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2004.14719
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