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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.

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File URL: http://hdl.handle.net/10.1093/cesifo/ifq013
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Bibliographic Info

Article provided by CESifo in its journal CESifo Economic Studies.

Volume (Year): 56 (2010)
Issue (Month): 4 (December)
Pages: 596-626

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Handle: RePEc:oup:cesifo:v:56:y:2010:i:4:p:596-626

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Cited by:
  1. Bekaert, Geert & Hoerova, Marie & Lo Duca, Marco, 2013. "Risk, uncertainty and monetary policy," Working Paper Series 1565, European Central Bank.
  2. Matthieu Bussiere & Alexander Chudik & Arnaud Mehl, 2011. "How have global shocks impacted the real effective exchange rates of individual Euro area countries since the Euro's creation?," Globalization and Monetary Policy Institute Working Paper 102, Federal Reserve Bank of Dallas.
  3. R?diger Bachmann & Steffen Elstner & Eric R. Sims, 2013. "Uncertainty and Economic Activity: Evidence from Business Survey Data," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(2), pages 217-49, April.
  4. Scott R. Baker & Nicholas Bloom, 2013. "Does Uncertainty Reduce Growth? Using Disasters as Natural Experiments," NBER Working Papers 19475, National Bureau of Economic Research, Inc.
  5. Benjamin Born & Johannes Pfeifer, 2013. "Policy Risk and the Business Cycle," CESifo Working Paper Series 4336, CESifo Group Munich.
  6. Entorf, Horst & Knoll, Christian & Sattarova, Liliya, 2011. "Measuring confidence and uncertainty during the financial crisis: Evidence from the CFS survey," CFS Working Paper Series 2010/18, Center for Financial Studies (CFS).

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