Complementarity and Macroeconomic Uncertainty

37 Pages Posted: 29 Apr 2020

See all articles by Tyler Atkinson

Tyler Atkinson

affiliation not provided to SSRN

Michael Plante

Federal Reserve Bank of Dallas; Indiana University Bloomington - Center for Applied Economics and Policy Research

Alexander W. Richter

Federal Reserve Bank of Dallas

Nathaniel Throckmorton

affiliation not provided to SSRN

Date Written: March, 2020

Abstract

Macroeconomic uncertainty—the conditional volatility of the unforecastable component of a future value of a time series—shows considerable variation in the data. A typical assumption in business cycle models is that production is Cobb-Douglas. Under that assumption, this paper shows there is usually little, if any, endogenous variation in output uncertainty, and first moment shocks have similar effects in all states of the economy. When the model departs from Cobb-Douglas production and assumes capital and labor are gross complements, first-moment shocks have state-dependent effects and can cause meaningful variation in uncertainty compared to the data. Estimating several variants of a nonlinear real business cycle model reveals the data strongly prefers a model with high complementarity between capital and labor inputs.

Keywords: Nonlinear Estimation, Time-Varying Volatility, CES Production, State-Dependent

JEL Classification: C15, D81, E32, E37

Suggested Citation

Atkinson, Tyler and Plante, Michael D. and Richter, Alexander W. and Throckmorton, Nathaniel, Complementarity and Macroeconomic Uncertainty (March, 2020). FRB of Dallas Working Paper No. 2009. Available at SSRN: https://ssrn.com/abstract=3587635 or http://dx.doi.org/10.24149/wp2009

Tyler Atkinson (Contact Author)

affiliation not provided to SSRN

No Address Available

Michael D. Plante

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Indiana University Bloomington - Center for Applied Economics and Policy Research ( email )

100 South Woodlawn Avenue, Wylie Hall 250
Bloomington, IN 47405-1704
United States

Alexander W. Richter

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5360 (Phone)

HOME PAGE: http://alexrichterecon.com

Nathaniel Throckmorton

affiliation not provided to SSRN

No Address Available

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