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| Type | Journal Article |
| Scope | Discipline-based scholarship |
| Title | Really uncertain business cycles |
| Organization Unit | |
| Authors |
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| Item Subtype | Original Work |
| Refereed | Yes |
| Status | Published in final form |
| Language |
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| Journal Title | Econometrica |
| Publisher | Econometric Society |
| Geographical Reach | international |
| ISSN | 0012-9682 |
| Volume | 86 |
| Number | 3 |
| Page Range | 1031 - 1065 |
| Date | 2018 |
| Abstract Text | We investigate the role of uncertainty in business cycles. First, we demonstrate that microeconomic uncertainty rises sharply during recessions, including during the Great Recession of 2007–2009. Second, we show that uncertainty shocks can generate drops in gross domestic product of around 2.5% in a dynamic stochastic general equilibrium model with heterogeneous firms. However, we also find that uncertainty shocks need to be supplemented by first‐moment shocks to fit consumption over the cycle. So our data and simulations suggest recessions are best modelled as being driven by shocks with a negative first moment and a positive second moment. Finally, we show that increased uncertainty can make first‐moment policies, like wage subsidies, temporarily less effective because firms become more cautious in responding to price changes. |
| Free access at | DOI |
| Official URL | https://onlinelibrary.wiley.com/doi/abs/10.3982/ECTA10927 |
| Digital Object Identifier | 10.3982/ECTA10927 |
| Other Identification Number | merlin-id:16434 |
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| Keywords | Uncertainty, adjustment costs, business cycles |