Uncertainty Shocks in a Model of Effective Demand: Reply

7 Pages Posted: 30 Jul 2018

See all articles by Susanto Basu

Susanto Basu

Boston College, College of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Brent Bundick

Federal Reserve Bank of Kansas City

Date Written: July 2018

Abstract

de Groot, Richter, and Throckmorton (2018) argue that the model in Basu and Bundick (2017) can match the empirical evidence only because the model assumes an asymptote in the economy's response to an uncertainty shock. In this Reply, we provide new results showing that our model's ability to match the data does not rely either on assuming preferences that imply an asymptote nor on a particular value of the intertemporal elasticity of substitution. We demonstrate that shifting to preferences that are not vulnerable to the Comment's critique does not change our previous conclusions about the propagation of uncertainty shocks to macroeconomic outcomes.

Keywords: Uncertainty Shocks, Monetary Policy, Sticky-Price Models

JEL Classification: E32, E52

Suggested Citation

Basu, Susanto and Bundick, Brent, Uncertainty Shocks in a Model of Effective Demand: Reply (July 2018). Federal Reserve Bank of Kansas City Working Paper No. RWP 18-05, Available at SSRN: https://ssrn.com/abstract=3216683 or http://dx.doi.org/10.2139/ssrn.3216683

Susanto Basu (Contact Author)

Boston College, College of Arts and Sciences, Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467-3806
United States
617-552-2308 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Brent Bundick

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States

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