AbstractWe develop a quantitative theory of endogenous uncertainty and business cycles. In the model, higher uncertainty about fundamentals discourages investment but agents can learn from the actions of others. Therefore, in times of low activity information flows slowly and uncertainty stays high, further discouraging investment. This creates room for uncertainty traps -- self-reinforcing episodes of high uncertainty and low activity. We characterize conditions that give rise to uncertainty traps. Negative shocks to average productivity or beliefs may have permanent effects on the level of activity through the persistence of uncertainty. We also characterize optimal policy interventions. The socially efficient allocation can be implemented with aggregate-beliefs dependent subsidies, but under certain conditions it necessarily features uncertainty traps. We embed these forces into a standard quantitative model of the business cycle to evaluate the impact of uncertainty traps.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 677.
Date of creation: 2013
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
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- Ruediger Bachmann & Steffen Elstner & Eric R. Sims, 2010.
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NBER Working Papers
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:CitEc Project, subscribe to its RSS feed for this item.
- Scott R. Baker & Nicholas Bloom, 2013.
"Does Uncertainty Reduce Growth? Using Disasters as Natural Experiments,"
CEP Discussion Papers
dp1243, Centre for Economic Performance, LSE.
- 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.
- Hikaru Saijo, 2013. "The Uncertainty Multiplier and Business Cycles," UTokyo Price Project Working Paper Series 017, University of Tokyo, Graduate School of Economics.
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