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The long-run effects of uncertainty shocks

Dario Bonciani () and Joonseok Oh

No 802, Bank of England working papers from Bank of England

Abstract: This paper argues that shocks increasing macroeconomic uncertainty negatively affect economic activity not only in the short but also in the long run. In a sticky-price DSGE model with endogenous growth through investment in R&D, uncertainty shocks lead to a short-term fall in demand because of precautionary savings and rising markups. The decline in the utilised aggregate stock of R&D determines a fall in productivity, which causes a long-term decline in the main macroeconomic aggregates. When households feature Epstein-Zin preferences, they become averse to these long-term risks affecting their consumption process (long-run risk channel), which strongly exacerbates the precautionary savings motive and the overall negative effects of uncertainty shocks.

Keywords: Uncertainty shocks; R&D; endogenous growth (search for similar items in EconPapers)
JEL-codes: E32 O40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-gro, nep-mac and nep-upt
Date: 2019-06-07
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