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Firm Uncertainty Cycles and the Propagation of Nominal Shocks

Author

Listed:
  • Isaac Baley
  • Andrés Blanco

Abstract

We develop a framework to study the impact of idiosyncratic uncertainty on aggregate economic outcomes. Agents learn about individual characteristics, which receive infrequent, large, and persistent shocks. In this environment, idiosyncratic uncertainty moves in cycles, fluctuating between periods of high and low uncertainty; with additional fixed adjustment costs, the frequency and size of agents' actions also fluctuate in cycles. We apply our framework to study pricing behavior and the propagation of nominal shocks. We show, analytically and quantitatively, that idiosyncratic uncertainty cycles amplify the real effects of nominal shocks by generating cross-sectional dispersion in firms' adjustment frequency and in learning speed.

Suggested Citation

  • Isaac Baley & Andrés Blanco, 2019. "Firm Uncertainty Cycles and the Propagation of Nominal Shocks," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(1), pages 276-337, January.
    • Handle: RePEc:aea:aejmac:v:11:y:2019:i:1:p:276-337
    Note: DOI: 10.1257/mac.20170402
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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