Working Paper: NBER ID: w28026
Authors: Timothy Cogley; Boyan Jovanovic
Abstract: We study the effects of parameter uncertainty prompted by structural breaks. In our model, agents respond differently to uncertainty prompted by regime shifts in shock processes than they react to comparable perceived increases in shock volatility. The magnitude of the response to an increase in uncertainty about TFP associated with a structural break is greater than that of a response to a comparable perceived rise in volatility. This is because lifetime utility varies more when shocks shift beliefs and perceived wealth.
Keywords: Structural breaks; Endogenous growth; Parameter uncertainty; Learning; Macroeconomics
JEL Codes: E1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| structural breaks (L16) | increased uncertainty about TFP (D89) |
| increased uncertainty about TFP (D89) | savings and investment behavior (D14) |
| structural breaks (L16) | precautionary savings (D14) |
| precautionary savings (D14) | higher growth (O49) |
| increased uncertainty about TFP (D89) | precautionary savings (D14) |
| learning about TFP (F16) | stronger responses in consumption and growth (F62) |
| structural breaks (L16) | shift in beliefs and perceived wealth (E21) |