When It Rains It Pours: Cascading Uncertainty Shocks

Journal of Political Economy

197 Pages Posted: 30 Jul 2019 Last revised: 30 Mar 2023

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: February 24, 2023

Abstract

The effects of uncertainty shocks are superadditive. Based on local projections, we find the combination of nearby positive shocks can be multiple times more powerful than the sum of their standalone effects. 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. Intuitively, an agent already bearing one risk is less willing to bear another in the presence of edginess.

Keywords: Dynamic Equilibrium Economies; Stochastic Volatility; Perturbation; Path dependency..

JEL Classification: C63, C68, E37

Suggested Citation

Diercks, Anthony M. and Hsu, Alex and Tamoni, Andrea, When It Rains It Pours: Cascading Uncertainty Shocks (February 24, 2023). Journal of Political Economy, 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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