Working Paper: NBER ID: w25386
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: Macroeconomic Uncertainty; Business Cycles; Risk Premia
JEL Codes: C11; C32; E32; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| demand-side uncertainty (D89) | contraction in real activity (E20) |
| supply-side uncertainty (D89) | contraction in real activity (E20) |
| demand-side uncertainty (D89) | increase in term premia (E43) |
| supply-side uncertainty (D89) | increase in term premia (E43) |
| supply-side uncertainty (D89) | larger effects on inflation (E31) |
| supply-side uncertainty (D89) | larger effects on investment (E22) |
| shocks to time discount factor (D15) | demand uncertainty (D89) |
| total factor productivity (TFP) growth shocks (O49) | supply uncertainty (D89) |
| uncertainty shocks (D89) | variation in investment growth (E20) |
| uncertainty shocks (D89) | variation in consumption growth (E20) |
| uncertainty (D89) | business cycle fluctuations (E32) |
| risk propagation channels (O36) | dynamics of consumption (E21) |
| risk propagation channels (O36) | dynamics of investment (E22) |
| risk propagation channels (O36) | dynamics of inflation (E31) |