Working Paper: NBER ID: w26768
Authors: Jess Fernández-Villaverde; Pablo A. Guerrón-Quintana
Abstract: We review the literature on uncertainty shocks and business cycle research. First, we motivate the study of uncertainty shocks by documenting the presence of time-variation in the volatility of macroeconomic time series. Second, we enumerate the mechanisms that researchers have postulated to link uncertainty shocks and business cycles. Third, we outline how we can specify uncertainty shocks. Fourth, we postulate a real business cycle model augmented with financial frictions and uncertainty shocks. Fifth, we use the model to illustrate our previous discussions and to show how uncertainty shocks can be expansionary.
Keywords: Uncertainty; Business Cycles; Financial Frictions
JEL Codes: E30; E32; E50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Uncertainty shocks (D89) | Business cycles (E32) |
| High uncertainty (D89) | Low economic activity (E29) |
| Uncertainty shocks (D89) | Fluctuations in economic activity (E32) |
| Increased uncertainty (D89) | Precautionary behavior (D18) |
| Precautionary behavior (D18) | Lower interest rates (E43) |
| Lower interest rates (E43) | Higher consumption (E21) |
| Higher consumption (E21) | Investment decisions (G11) |
| Uncertainty (D89) | Modify binding nature of financial frictions (G19) |
| Aggregate consequences of changes in precautionary behavior (E71) | Expansionary effects (F41) |