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Uncertainty Shocks in a Model of Effective Demand: Reply

Susanto Basu () and Brent Bundick ()

No RWP 18-5, Research Working Paper from Federal Reserve Bank of Kansas City

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.

Keywords: Uncertainty shocks; Monetary policy; Sticky-price models (search for similar items in EconPapers)
JEL-codes: E32 E52 (search for similar items in EconPapers)
Pages: 6 pages
Date: 2018-07-13
New Economics Papers: this item is included in nep-dge and nep-mac
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