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The long-run effects of uncertainty shocks

Author

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  • Bonciani, Dario

    (Bank of England)

  • Oh, Joonseok Jason

    (European University Institute)

Abstract

This paper argues that shocks increasing macroeconomic uncertainty negatively affect economic activity not only in the short but also in the long run. In a sticky-price DSGE model with endogenous growth through investment in R&D, uncertainty shocks lead to a short-term fall in demand because of precautionary savings and rising markups. The decline in the utilised aggregate stock of R&D determines a fall in productivity, which causes a long-term decline 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 strongly exacerbates the precautionary savings motive and the overall negative effects of uncertainty shocks.

Suggested Citation

  • Bonciani, Dario & Oh, Joonseok Jason, 2019. "The long-run effects of uncertainty shocks," Bank of England working papers 802, Bank of England.
    • Handle: RePEc:boe:boeewp:0802
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    References listed on IDEAS

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    3. Hong, T., 2021. "Revisiting the Trade Policy Uncertainty Index," Cambridge Working Papers in Economics 2174, Faculty of Economics, University of Cambridge.
    4. Salgado Alfredo & Trujillo Alejandro, 2023. "Growth at Risk and Uncertainty: Evidence from Mexico," Working Papers 2023-08, Banco de México.
    5. Olli Palm'en, 2022. "Macroeconomic Effect of Uncertainty and Financial Shocks: a non-Gaussian VAR approach," Papers 2202.10834, arXiv.org.
    6. Pinchetti, Marco, 2020. "What Is Driving The TFP Slowdown? Insights From a Schumpeterian DSGE Model," MPRA Paper 98316, University Library of Munich, Germany.

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    More about this item

    Keywords

    Uncertainty shocks; R&D; 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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