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Uncertainty, Financial Frictions, and Nominal Rigidities: A Quantitative Investigation

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  • AMBROGIO CESA‐BIANCHI
  • EMILIO FERNANDEZ‐CORUGEDO

Abstract

Are uncertainty shocks a major source of business cycle fluctuations? This paper studies the effect of a mean preserving shock to the variance of aggregate total factor productivity (macro‐uncertainty) and to the dispersion of entrepreneurs' idiosyncratic productivity (micro‐uncertainty) in a financial accelerator dynamic stochastic general equilibrium model with sticky prices. It explores the different mechanisms through which uncertainty shocks are propagated and amplified. The time‐series properties of macro‐ and micro‐uncertainty are estimated using U.S. aggregate and firm‐level data, respectively. While surprise increases in micro‐uncertainty have a larger impact on total output than macro‐uncertainty, these can only account for a small (but nontrivial) share of output volatility.

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  • Ambrogio Cesa‐Bianchi & Emilio Fernandez‐Corugedo, 2018. "Uncertainty, Financial Frictions, and Nominal Rigidities: A Quantitative Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(4), pages 603-636, June.
    • Handle: RePEc:wly:jmoncb:v:50:y:2018:i:4:p:603-636
    DOI: 10.1111/jmcb.12505
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    6. Benjamin Born & Johannes Pfeifer, 2021. "Uncertainty‐driven business cycles: Assessing the markup channel," Quantitative Economics, Econometric Society, vol. 12(2), pages 587-623, May.
    7. Josué Diwambuena & Jean-Paul K. Tsasa, 2021. "The Real Effects of Uncertainty Shocks: New Evidence from Linear and Nonlinear SVAR Models," BEMPS - Bozen Economics & Management Paper Series BEMPS87, Faculty of Economics and Management at the Free University of Bozen.
    8. Arbex, Marcelo & Caetano, Sidney & Correa, Wilson, 2019. "Macroeconomic effects of inflation target uncertainty shocks," Economics Letters, Elsevier, vol. 181(C), pages 111-115.
    9. Kamalyan, Hayk & Davtyan, Vahagn, 2022. "Exchange Rate Uncertainty and Business Cycle Fluctuations," MPRA Paper 113443, University Library of Munich, Germany.
    10. Anna Belianska & Aurélien Eyquem & Céline Poilly, 2021. "The Transmission Channels of Government Spending Uncertainty," AMSE Working Papers 2115, Aix-Marseille School of Economics, France.
    11. Balcilar, Mehmet & Ozdemir, Zeynel Abidin & Ozdemir, Huseyin & Aygun, Gurcan & Wohar, Mark E., 2022. "The macroeconomic impact of economic uncertainty and financial shocks under low and high financial stress," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
    12. Joonseok Oh, 2020. "The Propagation Of Uncertainty Shocks: Rotemberg Versus Calvo," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(3), pages 1097-1113, August.
    13. Emanuele Bacchiocchi & Catalin Dragomirescu-Gaina, 2021. "Uncertainty spill-overs: when policy and financial realms overlap," Papers 2102.06404, arXiv.org.
    14. Christian Grimme, 2023. "Uncertainty and the Cost of Bank versus Bond Finance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(1), pages 143-169, February.
    15. Ferreira Costa, Carlos Germano, 2021. "Increased vulnerability of family farming in the context of a weakened FNS agenda due to austerity measures in Brazil," Economia Agraria y Recursos Naturales, Spanish Association of Agricultural Economists, vol. 21(01), June.
    16. Chikhale, Nisha, 2023. "The effects of uncertainty shocks: Implications of wealth inequality," European Economic Review, Elsevier, vol. 154(C).
    17. OH, Joonseok, 2019. "The propagation of uncertainty shocks : Rotemberg vs. Calvo," Economics Working Papers ECO 2019/01, European University Institute.
    18. Higgins, C. Richard, 2023. "Risk and Uncertainty: The Role of Financial Frictions," Economic Modelling, Elsevier, vol. 119(C).
    19. Huang, Bihong & Punzi, Maria Teresa & Wu, Yu, 2019. "Do Banks Price Environmental Risk? Evidence from a Quasi Natural Experiment in the People’s Republic of China," ADBI Working Papers 974, Asian Development Bank Institute.
    20. Punzi, Maria Teresa, 2020. "The impact of uncertainty on the macro-financial linkage with international financial exposure," Journal of Economics and Business, Elsevier, vol. 110(C).
    21. Dorofeenko Victor & Lee Gabriel & Salyer Kevin & Strobel Johannes, 2020. "Risk shocks with time-varying higher moments," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 24(2), pages 1-20, April.
    22. Balke, Nathan S. & Martínez-García, Enrique & Zeng, Zheng, 2021. "In no uncertain terms: The effect of uncertainty on credit frictions and monetary policy," Economic Modelling, Elsevier, vol. 100(C).
    23. Chao Wu & Ziyu Liu & Jinquan Liu & Mingze Du, 2022. "Nonlinear Effects of Economic Policy Uncertainty Shocks on Carbon Emissions in China: Evidence from Province-Level Data," IJERPH, MDPI, vol. 19(23), pages 1-16, December.
    24. Valeriu Nalban & Andra Smadu, 2022. "Uncertainty shocks and the monetary-macroprudential policy mix," Working Papers 739, DNB.
    25. Li, Li & Chen, Hongyi & Xiang, Jingjie, 2023. "Oil price uncertainty, financial distress and real economic activities: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 81(C).

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