When It Rains It Pours: Cascading Uncertainty Shocks

100 Pages Posted: 30 Jul 2019 Last revised: 20 Jun 2021

See all articles by Anthony M. Diercks

Anthony M. Diercks

Board of Governors of the Federal Reserve System

Alex Hsu

Georgia Institute of Technology - Scheller College of Business

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: June 20, 2021

Abstract

The effects of uncertainty shocks are superadditive: the combination of nearby positive shocks is more powerful than the sum of their standalone effects. We document the superadditivity of uncertainty shocks via local projection and provide some narrative evidence about distinct uncertainty-inducing news events in close proximity to each other. In a standard New-Keynesian DSGE model, uncertainty shocks are proven to be superadditive only when the model is solved under fourth (or higher) order perturbation. The fourth order solution unlocks the fourth derivative of marginal utility, “edginess”, which is key to generating stronger reactions to multiple risks and superadditivity.

Keywords: Dynamic Equilibrium Economies; Stochastic Volatility; Perturbation.

JEL Classification: C63, C68, E37

Suggested Citation

Diercks, Anthony M. and Hsu, Alex and Tamoni, Andrea, When It Rains It Pours: Cascading Uncertainty Shocks (June 20, 2021). Available at SSRN: https://ssrn.com/abstract=3427326 or http://dx.doi.org/10.2139/ssrn.3427326

Anthony M. Diercks

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Alex Hsu (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
4043851123 (Phone)

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

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