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Uncertainty shocks are aggregate demand shocks

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  • Sylvain Leduc
  • Zheng Liu

Abstract

We study the macroeconomic effects of uncertainty shocks in a DSGE model with labor search frictions and sticky prices. In contrast to a real business cycle model, the model with search frictions implies that uncertainty shocks reduce potential output, because a job match represents a long-term employment relation and heightened uncertainty reduces the value of a match. In the sticky-price equilibrium, an uncertainty shock--regardless of its source--consistently acts like an aggregate demand shock because it raises unemployment and lowers inflation. We present empirical evidence--based on a vector autoregression model and using a few alternative measures of uncertainty--that supports the theory's prediction that uncertainty shocks are aggregate demand shocks.

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2012-10.

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Date of creation: 2012
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Handle: RePEc:fip:fedfwp:2012-10

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Keywords: Uncertainty ; Inflation (Finance) ; Unemployment;

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  1. Luigi Guiso & Giuseppe Parigi, 1999. "Investment And Demand Uncertainty," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 185-227, February.
  2. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta-Eksten & Stephen Terry, 2013. "Really uncertain business cycles," LSE Research Online Documents on Economics 51526, London School of Economics and Political Science, LSE Library.
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  5. Eric R. Sims, 2012. "Uncertainty and Economic Activity: Evidence from Business Survey Data," Working Papers 014, University of Notre Dame, Department of Economics, revised Jun 2012.
  6. Sylvain Leduc & Keith Sill, 2010. "Expectations and economic fluctuations: an analysis using survey data," Working Papers 10-6, Federal Reserve Bank of Philadelphia.
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  9. Jesus Fernandez-Villaverde & Pablo Guerron-Quintana & Keith Kuester & Juan Rubio-Ramirez, 2011. "Fiscal Volatility Shocks and Economic Activity," PIER Working Paper Archive 11-022, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
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Cited by:
  1. Bijsterbosch, Martin & Guérin, Pierre, 2013. "Characterizing very high uncertainty episodes," Economics Letters, Elsevier, vol. 121(2), pages 239-243.
  2. Hideaki Hirata & M. Ayhan Kose & Christopher Otrok & Marco Terrones, 2013. "Global House Price Fluctuations," IMF Working Papers 13/38, International Monetary Fund.
  3. Klodiana Istrefi & Anamaria Piloiu, 2013. "Economic Policy Uncertainty, Trust and Inflation Expectations," CESifo Working Paper Series 4294, CESifo Group Munich.
  4. Dario Bonciani & Björn van Roye, 2013. "Uncertainty shocks, banking frictions, and economic activity," Kiel Working Papers 1843, Kiel Institute for the World Economy.
  5. Hideaki Hirata & M. Ayhan Kose & Christopher Otrok & Marco E. Terrones, 2012. "Global House Price Fluctuations: Synchronization and Determinants," NBER Chapters, in: NBER International Seminar on Macroeconomics 2012, pages 119-166 National Bureau of Economic Research, Inc.
  6. Lillie Lam & James Yetman, 2013. "Asia’s decoupling: fact, forecast or fiction?," BIS Working Papers 438, Bank for International Settlements.
  7. Chiara Scotti, 2013. "Surprise and uncertainty indexes: real-time aggregation of real-activity macro surprises," International Finance Discussion Papers 1093, Board of Governors of the Federal Reserve System (U.S.).
  8. John C. Williams, 2013. "The economy and monetary policy in uncertain times," Speech 115, Federal Reserve Bank of San Francisco.
  9. repec:fip:fedfsp:y:2013:i:jan.14 is not listed on IDEAS
  10. Sylvain Leduc & Zheng Liu, 2012. "Uncertainty, unemployment, and inflation," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue sep17.

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