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Time‐Varying Uncertainty And The Credit Channel

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  • Victor Dorofeenko
  • Gabriel S. Lee
  • Kevin D. Salyer

Abstract

We extend the Carlstrom and Fuerst (American Economic Review, 1997, 87, pp. 893–910) agency cost model of business cycles by including time‐varying uncertainty in the technology shocks that affect capital production. We first demonstrate that standard linearization methods can be used to solve the model yet second moments enter the economy's equilibrium policy functions. We then demonstrate that an increase in uncertainty causes, ceteris paribus, a fall in investment supply. We also show that persistence of uncertainty affects both quantitatively and qualitatively the behaviour of the economy.

Suggested Citation

  • Victor Dorofeenko & Gabriel S. Lee & Kevin D. Salyer, 2008. "Time‐Varying Uncertainty And The Credit Channel," Bulletin of Economic Research, Wiley Blackwell, vol. 60(4), pages 375-403, October.
  • Handle: RePEc:bla:buecrs:v:60:y:2008:i:4:p:375-403
    DOI: 10.1111/j.1467-8586.2008.00284.x
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    Cited by:

    1. Francisco Covas & Wouter J. Den Haan, 2012. "The Role of Debt and Equity Finance Over the Business Cycle," Economic Journal, Royal Economic Society, vol. 122(565), pages 1262-1286, December.
    2. Clark, Gregory & Cummins, Neil, 2010. "Malthus to Modernity: England’s First Fertility Transition, 1760-1800," MPRA Paper 25465, University Library of Munich, Germany.
    3. Bachmann, Rüdiger & Zorn, Peter, 2020. "What drives aggregate investment? Evidence from German survey data," Journal of Economic Dynamics and Control, Elsevier, vol. 115(C).
    4. Viktor Dorofeenko & Gabriel S. Lee & Kevin D. Salyer, 2011. "Rationale Erklärungen für Immobilienpreis‐Bubbles: Die Auswirkungen von Risikoschocks auf die Wohnimmobilienpreisvolatilität und die Volatilität von Investitionen in Wohnimmobilien," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 12(2), pages 151-169, May.
    5. Grimme, Christian, 2017. "Uncertainty and the Cost of Bank vs. Bond Finance," MPRA Paper 79852, University Library of Munich, Germany.
    6. Dorofeenko, Viktor & Lee, Gabriel S. & Salyer, Kevin D., 2005. "Agency Costs and Investment Behavior," Economics Series 182, Institute for Advanced Studies.
    7. Kevin D. Salyer & Gabriel S. Lee & Victor Dorofeenko, 2010. "Risk Shocks and Housing Markets," 2010 Meeting Papers 451, Society for Economic Dynamics.
    8. Dorofeenko, Victor & Lee, Gabriel S. & Salyer, Kevin D., 2010. "Risk Shocks and Housing Markets," Economics Series 249, Institute for Advanced Studies.
    9. Balke, Nathan S. & Martínez-García, Enrique & Zeng, Zheng, 2021. "In no uncertain terms: The effect of uncertainty on credit frictions and monetary policy," Economic Modelling, Elsevier, vol. 100(C).
    10. Dorofeenko, Victor & Lee, Gabriel S. & Salyer, Kevin D., 2014. "Risk shocks and housing supply: A quantitative analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 45(C), pages 194-219.
    11. Anh Nguyen, 2015. "Financial frictions and the volatility of monetary policy in a DSGE model," Working Papers 75949436, Lancaster University Management School, Economics Department.
    12. Ekaterina Pirozhkova, 2017. "Banks' balance sheet, uncertainty and macroeconomy," EcoMod2017 10430, EcoMod.
    13. Cesa-Bianchi, Ambrogio & Fernandez-Corugedo, Emilio, 2014. "Uncertainty in a model with credit frictions," Bank of England working papers 496, Bank of England.
    14. Grimme, Christian & Siemsen, Thomas, 2014. "Are You a Lehman, Brother? Interbank Uncertainty in a DSGE Model," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100498, Verein für Socialpolitik / German Economic Association.
    15. Sanjay Chugh, 2016. "Firm Risk and Leverage-Based Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 111-131, April.
    16. Nathan S. Balke & Enrique Martinez-Garcia & Zheng Zeng, 2017. "Understanding the Aggregate Effects of Credit Frictions and Uncertainty," Globalization Institute Working Papers 317, Federal Reserve Bank of Dallas.
    17. Ruediger Bachmann, 2015. "What Drives Aggregate Investment?," 2015 Meeting Papers 323, Society for Economic Dynamics.
    18. Bachmann, Rüdiger & Bayer, Christian, 2013. "‘Wait-and-See’ business cycles?," Journal of Monetary Economics, Elsevier, vol. 60(6), pages 704-719.
    19. Mehkari, M. Saif, 2016. "Uncertainty shocks in a model with mean-variance frontiers and endogenous technology choices," Journal of Macroeconomics, Elsevier, vol. 49(C), pages 71-98.
    20. Gabriel Lee & Victor Dorofeenko & Kevin Salyer, "undated". "Risk Shocks and Housing Markets," Working Papers 1011, University of California, Davis, Department of Economics.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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