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Uncertainty, Risk-taking, and the Business Cycle in Germany

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  • Adina Popescu
  • Frank Rafael Smets

Abstract

This article investigates the business cycle behaviour of measures of perceived uncertainty and financial risk premia in Germany over the past two decades. Both the perceived uncertainty and the financial risk premia are highly countercyclical and may therefore amplify and propagate the transmission of business cycle shocks. We find that exogenous uncertainty shocks have a significantly small but temporary effect on output and financial risk premia and their overall contribution to output developments is limited. Positive financial risk aversion shocks, on the contrary, have a protractred but large negative impact on the economy and are more important in driving business cycles than uncertainty shocks. (JEL codes: E32, E44, G01, G20) Copyright The Author 2010. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Suggested Citation

  • Adina Popescu & Frank Rafael Smets, 2010. "Uncertainty, Risk-taking, and the Business Cycle in Germany," CESifo Economic Studies, CESifo Group, vol. 56(4), pages 596-626, December.
    • Handle: RePEc:oup:cesifo:v:56:y:2010:i:4:p:596-626
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    File URL: http://hdl.handle.net/10.1093/cesifo/ifq013
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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