Economics at your fingertips  

A New Way to Quantify the Effect of Uncertainty

Alexander Richter () and Nathaniel Throckmorton

No 565, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: This paper develops a new way to quantify the effect of uncertainty and other higher-order moments. First, we estimate a nonlinear model using Bayesian methods with data on uncertainty, in addition to common macro time series. This key step disciplines the model and allows us to generate data-driven policy functions for any higher-order moment. Second, we use the Euler equation to analytically decompose consumption into several terms--expected consumption, the ex-ante real interest rate and the ex-ante variance and skewness of future consumption, technology growth, and inflation--and then use the policy functions to filter the data and generate a time series for the effect of each term. We apply our method to a familiar New Keynesian model with a zero lower bound constraint on the nominal interest rate and two stochastic volatility shocks, but it is adaptable to any dynamic model. Over a 1-quarter horizon, uncertainty has a very small effect on consumption, similar to the volatility shocks in our model. Over horizons that remove the influence of expected consumption, the effect of uncertainty is an order of magnitude larger. Other higher-order moments have much smaller effects.

Date: 2018
New Economics Papers: this item is included in nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (application/pdf)

Related works:
Working Paper: A New Way to Quantify the Effect of Uncertainty (2017) Downloads
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:

Access Statistics for this paper

More papers in 2018 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().

Page updated 2021-07-18
Handle: RePEc:red:sed018:565