Advanced Search
MyIDEAS: Login

Uncertainty in a model with credit frictions

Contents:

Author Info

  • Cesa-Bianchi, Ambrogio

    ()
    (Bank of England)

  • Fernandez-Corugedo, Emilio

    (Bank of England)

Abstract

This paper investigates the relationship between uncertainty and economic activity in a DSGE model with sticky prices and credit frictions. We analyse the effect of a mean preserving shock to the variance of aggregate total factor productivity (macro uncertainty) and we compare it to the effect of a mean preserving shock to the dispersion of entrepreneurs' idiosyncratic productivity (micro uncertainty). We find that micro uncertainty has a larger impact on economic activity. While macro uncertainty is transmitted through precautionary savings, micro uncertainty primarily acts through the cost of external debt and capital demand and, therefore, it is greatly magnified by the credit friction. Our findings suggest that uncertainty shocks can generate sizable impact on economic activity only when transmitted through a credit channel.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2014/wp496.pdf
File Function: Full text
Download Restriction: no

Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 496.

as in new window
Length: 49 pages
Date of creation: 17 Apr 2014
Date of revision:
Handle: RePEc:boe:boeewp:0496

Contact details of provider:
Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH
Phone: +44 (0)171 601 4030
Fax: +44 (0)171 601 5196
Email:
Web page: http://www.bankofengland.co.uk/
More information through EDIRC

Related research

Keywords: Uncertainty shocks; credit frictions; business cycles; micro uncertainty; macro uncertainty; financial accelerator;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Susanto Basu & Brent Bundick, 2012. "Uncertainty Shocks in a Model of Effective Demand," NBER Working Papers 18420, National Bureau of Economic Research, Inc.
  2. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  3. John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers 1995-5, Edinburgh School of Economics, University of Edinburgh.
  4. Timothy Fuerst & Matthias Paustian & Charles Carlstorm, 2009. "Optimal monetary policy in a model with agency costs," 2009 Meeting Papers 667, Society for Economic Dynamics.
  5. Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Solving Dynamic General Equilibrium Models Using a Second-Order Approximation to the Policy Function," NBER Technical Working Papers 0282, National Bureau of Economic Research, Inc.
  6. Alejandro Justiniano & Giorgio E. Primiceri, 2006. "The Time Varying Volatility of Macroeconomic Fluctuations," NBER Working Papers 12022, National Bureau of Economic Research, Inc.
  7. François Gourio, 2009. "Disasters Risk and Business Cycles," NBER Working Papers 15399, National Bureau of Economic Research, Inc.
  8. Tommaso Monacelli & Ester Faia, 2005. "Optimal Interest Rate Rules, Asset Prices and Credit Frictions," Computing in Economics and Finance 2005 452, Society for Computational Economics.
  9. Dario Caldara & Jesús Fernández-Villaverde & Juan F. Rubio-Ramírez & Yao Wen, 2012. "Computing DSGE models with recursive preferences and stochastic volatility," Finance and Economics Discussion Series 2012-04, Board of Governors of the Federal Reserve System (U.S.).
  10. Pablo Guerron & Martin Uribe & Juan Rubio-Ramirez & Jesus Fernandez-Villaverde, 2010. "Risk Matters: The Real Effects of Volatility Shocks," 2010 Meeting Papers 281, Society for Economic Dynamics.
  11. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-33, March.
  12. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
  13. Steffen Elstner & Eric Sims & Ruediger Bachmann, 2010. "Uncertainty and Economic Activity: Evidence from Business Survey Data," 2010 Meeting Papers 614, Society for Economic Dynamics.
  14. Kevin Salyer & Gabriel S. Lee, 2004. "Time-Varying Uncertainty and the Credit Channel," Working Papers 29, University of California, Davis, Department of Economics.
  15. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers 341, Department of Economics and Business, Universitat Pompeu Fabra.
  16. Nir Jaimovich & Sergio Rebelo, 2006. "Can News About the Future Drive the Business Cycle?," 2006 Meeting Papers 31, Society for Economic Dynamics.
  17. Holmström, Bengt & Tirole, Jean, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," IDEI Working Papers 40, Institut d'Économie Industrielle (IDEI), Toulouse.
  18. Andrea Gerali & Stefano Neri & Luca Sessa & Federico M. Signoretti, 2010. "Credit and banking in a DSGE model of the euro area," Temi di discussione (Economic working papers) 740, Bank of Italy, Economic Research and International Relations Area.
  19. Fisher, Jonas D M, 1999. "Credit Market Imperfections and the Heterogeneous Response of Firms to Monetary Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(2), pages 187-211, May.
  20. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  21. Barro, Robert J & King, Robert G, 1984. "Time-separable Preferences and Intertemporal-Substitution Models of Business Cycles," The Quarterly Journal of Economics, MIT Press, vol. 99(4), pages 817-39, November.
  22. Hartman, Richard, 1976. "Factor Demand with Output Price Uncertainty," American Economic Review, American Economic Association, vol. 66(4), pages 675-81, September.
  23. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.
  24. Vasco Cúrdia & Michael Woodford, 2009. "Credit Spreads and Monetary Policy," Discussion Papers 0910-01, Columbia University, Department of Economics.
  25. Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 821-852.
  26. Russell W. Cooper & John C. Haltiwanger, 2000. "On the Nature of Capital Adjustment Costs," NBER Working Papers 7925, National Bureau of Economic Research, Inc.
  27. Benjamin Born & Johannes Pfeifer, 2013. "Policy Risk and the Business Cycle," CESifo Working Paper Series 4336, CESifo Group Munich.
  28. Susanto Basu & John Fernald & Miles Kimball, 2004. "Are Technology Improvements Contractionary?," NBER Working Papers 10592, National Bureau of Economic Research, Inc.
  29. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  30. John Fernald & Kyle Matoba, 2009. "Growth accounting, potential output, and the current recession," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue aug17.
  31. Ruediger Bachmann & Giuseppe Moscarini, 2011. "Business Cycles and Endogenous Uncertainty," 2011 Meeting Papers 36, Society for Economic Dynamics.
  32. Timothy S. Fuerst & Charles T. Carlstrom, 1998. "Agency costs and business cycles," Economic Theory, Springer, vol. 12(3), pages 583-597.
  33. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05.
  34. Ambrogio Cesa-Bianchi & M. Hashem Pesaran & Alessandro Rebucci, 2014. "Uncertainty and Economic Activity: A Global Perspective," CESifo Working Paper Series 4736, CESifo Group Munich.
  35. Bernanke, Ben S, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, MIT Press, vol. 98(1), pages 85-106, February.
  36. John Fernald, 2012. "A quarterly, utilization-adjusted series on total factor productivity," Working Paper Series 2012-19, Federal Reserve Bank of San Francisco.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Vivek Prasad, 2014. "Balanced budget stimulus with tax cuts in a liquidity constrained economy," Birkbeck Working Papers in Economics and Finance 1401, Birkbeck, Department of Economics, Mathematics & Statistics.
  2. Dario Bonciani & Björn van Roye, 2013. "Uncertainty shocks, banking frictions, and economic activity," Kiel Working Papers 1843, Kiel Institute for the World Economy.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:boe:boeewp:0496. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Publications Team).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.