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Uncertainty Shocks, Innovation, and Productivity

Author

Listed:
  • Bonciani Dario

    (Bank of England, Threadneedle Street, London, EC2R 8AH, UK)

  • Oh Joonseok

    (Chair of Macroeconomics, School of Business and Economics, Freie Universität Berlin, Boltzmannstrasse 20, 14195, Berlin, Germany)

Abstract

In this paper, we argue that macroeconomic uncertainty shocks cause a persistent decline in economic activity, investment in R&D, and total factor productivity. After providing empirical evidence, we build a DSGE model with sticky prices and endogenous growth through investment in R&D. In this framework, uncertainty shocks lead to a short-term fall in demand because of precautionary savings and rising markups. The reduction in the utilised aggregate stock of R&D determines a fall in productivity, which causes a long-term reduction in the main macroeconomic aggregates. When households feature Epstein–Zin preferences, they become averse to these long-term risks affecting their consumption process (long-run risk channel), which severely exacerbates the precautionary savings motive and the overall adverse effects of uncertainty shocks.

Suggested Citation

  • Bonciani Dario & Oh Joonseok, 2023. "Uncertainty Shocks, Innovation, and Productivity," The B.E. Journal of Macroeconomics, De Gruyter, vol. 23(1), pages 279-335, January.
    • Handle: RePEc:bpj:bejmac:v:23:y:2023:i:1:p:279-335:n:7
    DOI: 10.1515/bejm-2021-0074
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    More about this item

    Keywords

    uncertainty shocks; R&D; total factor productivity; endogenous growth;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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