Working Paper: CEPR ID: DP13450
Authors: Francesco Bianchi; Howard Kung; Mikhail Tirskikh
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: uncertainty shocks; business cycles; term structure of interest rates; time-varying risk premia
JEL Codes: E32; C11; C32; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Demand uncertainty (D89) | Contractions in real activity (E23) |
| Supply uncertainty (D89) | Contractions in real activity (E23) |
| Demand uncertainty (D89) | Increase in term premia (E43) |
| Supply uncertainty (D89) | Increase in term premia (E43) |
| Supply uncertainty (D89) | Larger effect on inflation (E31) |
| Supply uncertainty (D89) | Larger effect on investment (G31) |
| Uncertainty shocks (D89) | Variation in investment growth (E20) |
| Uncertainty shocks (D89) | Variation in consumption growth (F62) |
| Uncertainty shocks (D89) | Variation in the slope of the nominal yield curve (E43) |
| Uncertainty (D89) | Consumption fluctuations (E21) |
| Uncertainty (D89) | Investment fluctuations (F21) |
| Supply-side uncertainty (D89) | More severe recessions (F44) |
| Demand-side uncertainty (D89) | Less severe recessions (E32) |
| Precautionary savings channel (E21) | Influence on dynamics of uncertainty (D80) |
| Investment risk premium (G11) | Influence on dynamics of uncertainty (D80) |
| Nominal pricing bias (D40) | Influence on dynamics of uncertainty (D80) |