Macroeconomic Effects of Financial Uncertainty

Grzegorz Długoszek

No 1128, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: This paper investigates the macroeconomic effects of uncertainty originating in the financial sector by using the DSGE framework developed by Gertler and Karadi (2011). The model generates macroeconomic dynamics that are consistent with the empirical evidence. In particular, an increase in the financial uncertainty raises the risk premium and leads to a decline in output, consumption, investment and hours worked. This outcome arises mainly because of an endogenous tightening of the financial constraint, which in turn triggers the financial accelerator mechanism. Finally, nominal and real rigidities act as additional amplification mechanisms for financial uncertainty shocks.

Date: 2018
New Economics Papers: this item is included in nep-dge and nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:1128

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