The Long-Run Effects of Uncertainty Shocks

56 Pages Posted: 10 Jun 2019

See all articles by Dario Bonciani

Dario Bonciani

European University Institute

Joonseok Oh

Free University of Berlin (FUB) - Department of Business and Economics

Date Written: June 7, 2019

Abstract

This paper argues that shocks increasing macroeconomic uncertainty negatively affect economic activity not only in the short but also in the long run. In a sticky-price DSGE model with endogenous growth through investment in R&D, uncertainty shocks lead to a short-term fall in demand because of precautionary savings and rising markups. The decline in the utilised aggregate stock of R&D determines a fall in productivity, which causes a long-term decline in the main macroeconomic aggregates. When households feature Epstein-Zin preferences, they become averse to these long-term risks affecting their consumption process (long-run risk channel), which strongly exacerbates the precautionary savings motive and the overall negative effects of uncertainty shocks.

Keywords: uncertainty shocks, R&D, endogenous growth

JEL Classification: E32, O40

Suggested Citation

Bonciani, Dario and Oh, Joonseok, The Long-Run Effects of Uncertainty Shocks (June 7, 2019). Bank of England Working Paper No. 802 (2019), Available at SSRN: https://ssrn.com/abstract=3400834

Dario Bonciani (Contact Author)

European University Institute ( email )

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

Joonseok Oh

Free University of Berlin (FUB) - Department of Business and Economics ( email )

Boltzmannstrasse 20
D-14195 Berlin, 14195
Germany

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