The Origins and Effects of Macroeconomic Uncertainty
58 Pages Posted: 23 Jan 2019
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The Origins and Effects of Macroeconomic Uncertainty
Date Written: January 2019
Abstract
We construct and estimate a dynamic stochastic general equilibrium model that features demand- and supply-side uncertainty. Using term structure and macroeconomic data, we find sizable effects of uncertainty on risk premia and business cycle fluctuations. Both demand-side and supply-side uncertainty imply large contractions in real activity and an increase in term premia, but supply-side uncertainty has larger effects on inflation and investment. We introduce a novel analytical decomposition to illustrate how multiple distinct risk propagation channels account for these differences. Supply and demand uncertainty are strongly correlated in the beginning of our sample, but decouple in the aftermath of the Great Recession.
Keywords: Business Cycles, Term Structure of Interest Rates, time-varying risk premia, Uncertainty shocks
JEL Classification: C11, C32, E32, G12
Suggested Citation: Suggested Citation