Uncertainty, Financial Frictions and Nominal Rigidities: A Quantitative Investigation

Ambrogio Cesa-Bianchi and Emilio Fernández Corugedo

No 2017/211, IMF Working Papers from International Monetary Fund

Abstract: Are uncertainty shocks a major source of business cycle fluctuations? This paper studies the effect of a mean preserving shock to the variance of aggregate total factor productivity (macro uncertainty) and to the dispersion of entrepreneurs' idiosyncratic productivity (micro uncertainty) in a financial accelerator DSGE model with sticky prices. It explores the different mechanisms through which uncertainty shocks are propagated and amplified. The time series properties of macro and micro uncertainty are estimated using U.S. aggregate and firm-level data, respectively. While surprise increases in micro uncertainty have a larger impact on output than macro uncertainty, these account for a small (non-trivial) share of output volatility.

Keywords: WP; standard deviation; business cycle; Uncertainty shocks; Credit frictions; Business cycles; uncertainty; TFP shock; TFP innovation; TFP process; depreciation rate; transmission mechanism; nominal interest rate; nomi-nal price rigidity; price stickiness; uncertainty shock; flex price economy; Taylor series; inflation rate; Total factor productivity; Consumption; Sticky prices; Self-employment; Credit (search for similar items in EconPapers)
Pages: 45
Date: 2017-09-29
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Citations: View citations in EconPapers (6)

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Journal Article: Uncertainty, Financial Frictions, and Nominal Rigidities: A Quantitative Investigation (2018)
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