Policy Risk and the Business Cycle

37 Pages Posted: 29 Jul 2013

See all articles by Benjamin Born

Benjamin Born

Frankfurt School of Finance & Management

Johannes Pfeifer

University of Mannheim - School of Economics (VWL)

Date Written: July 29, 2013

Abstract

The argument that policy risk, i.e., uncertainty about monetary and fiscal policy, has been holding back the economic recovery in the U.S. during the Great Recession has a large popular appeal. We analyze the role of policy risk in explaining business cycle fluctuations by using an estimated New Keynesian model featuring policy risk as well as uncertainty about technology. We directly measure uncertainty from aggregate time series and find considerable evidence of time-varying policy risk in the data. However, the “pure uncertainty”-effect of policy risk is unlikely to play a major role in business cycle fluctuations. In the estimated model, output effects are relatively small because the aggregate policy risk shocks are i) too small and ii) not sufficiently amplified.

Keywords: policy risk, uncertainty, aggregate fluctuations, particle filter, nominal rigidities

JEL Classification: E320, E630, C110

Suggested Citation

Born, Benjamin and Pfeifer, Johannes, Policy Risk and the Business Cycle (July 29, 2013). CESifo Working Paper Series No. 4336, Available at SSRN: https://ssrn.com/abstract=2302490 or http://dx.doi.org/10.2139/ssrn.2302490

Benjamin Born (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Johannes Pfeifer

University of Mannheim - School of Economics (VWL) ( email )

Mannheim 68131
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
166
Abstract Views
956
rank
245,883
PlumX Metrics