Really Uncertain Business Cycles
55 Pages Posted: 12 Apr 2014
Date Written: March 01, 2014
We propose uncertainty shocks as a new shock that drives business cycles. First, we demonstrate that microeconomic uncertainty is robustly countercyclical, rising sharply during recessions, particularly during the Great Recession of 2007-2009. Second, we quantify the impact of timevarying uncertainty on the economy in a dynamic stochastic general equilibrium model with heterogeneous firms. We find that reasonably calibrated uncertainty shocks can explain drops and rebounds in GDP of around 3%. Moreover, we show that increased uncertainty alters the relative impact of government policies, making them initially less effective and then subsequently more effective.
Keywords: uncertainty, adjustment costs, business cycles
JEL Classification: D92, E22, D8, C23
Suggested Citation: Suggested Citation