Non-Linear Effects of Uncertainty

50 Pages Posted: 6 Mar 2018 Last revised: 10 May 2019

See all articles by Andreas Dibiasi

Andreas Dibiasi

EURAC Research; ETH Zürich - KOF Swiss Economic Institute

Date Written: May 8, 2019

Abstract

Recent empirical studies suggest that the negative effects of uncertainty shocks are stronger in recessions than during booms. In this study, I provide a theoretical mechanism that can explain this empirical observation. I start from the argument that the effect of uncertainty on investment depends on the degree of irreversibility. I then show that the degree of irreversibility increases during recessionary times. Incorporating this fact in a DSGE model with heterogeneous firms and uncertainty shows that time-varying irreversibility is able to produce state-dependent reactions of macroeconomic aggregates to an uncertainty shock that are similar to those observed in the data.

Keywords: investment, adjustment costs, irreversibility, uncertainty

JEL Classification: C23, D8, D92, E22

Suggested Citation

Dibiasi, Andreas, Non-Linear Effects of Uncertainty (May 8, 2019). Available at SSRN: https://ssrn.com/abstract=3130157 or http://dx.doi.org/10.2139/ssrn.3130157

Andreas Dibiasi (Contact Author)

EURAC Research ( email )

Viale Druso, 1
Drususallee 1
Bolzano / Bozen, 39100
Italy

ETH Zürich - KOF Swiss Economic Institute ( email )

Zurich
Switzerland

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