Uncertainty Traps

Pablo Fajgelbaum (), Edouard Schaal and Mathieu Taschereau-Dumouchel

No 19973, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a theory of endogenous uncertainty and business cycles in which short-lived shocks can generate long-lasting recessions. In the model, higher uncertainty about fundamentals discourages investment. Since agents learn from the actions of others, information flows slowly in times of low activity and uncertainty remains high, further discouraging investment. The economy displays uncertainty traps: self-reinforcing episodes of high uncertainty and low activity. While the economy recovers quickly after small shocks, large temporary shocks may have long-lasting effects on the level of activity. The economy is subject to an information externality but uncertainty traps may remain in the efficient allocation. Embedding the mechanism in a standard business cycle framework, we find that endogenous uncertainty increases the persistence of large recessions and improves the performance of the model in accounting for the Great Recession.

JEL-codes: E32 (search for similar items in EconPapers)
Date: 2014-03
New Economics Papers: this item is included in nep-dge and nep-mac
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Published as Pablo D. Fajgelbaum & Edouard Schaal & Mathieu Taschereau-Dumouchel, 2017. "Uncertainty Traps*," The Quarterly Journal of Economics, vol 132(4), pages 1641-1692.

Downloads: (external link)
http://www.nber.org/papers/w19973.pdf (application/pdf)

Related works:
Journal Article: Uncertainty Traps (2017)
Working Paper: Uncertainty Traps (2013)
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:nbr:nberwo:19973

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w19973

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().