Demand Shocks and Endogenous Uncertainty

Diego Vilán
Additional contact information
Diego Vilán: https://www.federalreserve.gov/econres/diego-vilan.htm
Authors registered in the RePEc Author Service: Diego Vilán

No 2026-050, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This study examines how fluctuations in firm-level uncertainty arise over the business cycle and how they influence aggregate economic activity. To do so, it develops a general equilibrium incomplete-markets model in which heterogeneous, risk-averse firms face idiosyncratic demand uncertainty and aggregate shocks to consumer credit conditions. A change in aggregate credit affects not only the expected level of firm demand, but also the cross-sectional dispersion of sales per worker by shifting the probability that firms operate at capacity. Thus, first-moment shocks give rise to endogenous second-moment effects. The model is disciplined using U.S. Compustat data on firm sales and employment and proprietary customer traffic data. The calibrated economy reproduces key cross-sectional moments and business-cycle comovements, including countercyclical dispersion in firm outcomes. Quantitatively, endogenous uncertainty accounts for roughly one quarter of the output response and one third of the employment response to aggregate credit shocks. The results suggest that uncertainty is not only an independent source of aggregate fluctuations, but also an endogenous propagation mechanism through which changes in demand conditions amplify business cycles.

Keywords: uncertainty; heterogeneous firms; cross-sectional firm dynamics (search for similar items in EconPapers)
JEL-codes: E21 E23 E32 E44 (search for similar items in EconPapers)
Pages: 62 p.
Date: 2026-07-16
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.federalreserve.gov/econres/feds/files/2026050pap.pdf Full text (application/pdf)

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:fip:fedgfe:103559

DOI: 10.17016/FEDS.2026.050

Access Statistics for this paper

More papers in Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().