Working Paper: NBER ID: w18682
Authors: Lawrence Christiano; Roberto Motto; Massimo Rostagno
Abstract: We augment a standard monetary DSGE model to include a Bernanke-Gertler-Gilchrist financial accelerator mechanism. We fit the model to US data, allowing the volatility of cross-sectional idiosyncratic uncertainty to fluctuate over time. We refer to this measure of volatility as 'risk'. We find that fluctuations in risk are the most important shock driving the business cycle.
Keywords: risk; business cycles; financial accelerator
JEL Codes: E2; E3; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fluctuations in risk (E32) | higher credit spreads (G19) |
| higher credit spreads (G19) | reduced credit available to entrepreneurs (G21) |
| reduced credit available to entrepreneurs (G21) | decline in investment (E22) |
| decline in investment (E22) | lower output (E23) |
| lower output (E23) | lower consumption (E21) |
| lower output (E23) | lower employment (J63) |
| lower output (E23) | lower inflation (E31) |
| fluctuations in risk (E32) | decline in investment (E22) |
| fluctuations in risk (E32) | lower output (E23) |
| fluctuations in risk (E32) | lower consumption (E21) |
| fluctuations in risk (E32) | lower employment (J63) |
| fluctuations in risk (E32) | lower inflation (E31) |