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The uncertainty multiplier and business cycles

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  • Saijo, Hikaru

Abstract

I study a business cycle model where agents learn about the fundamentals by accumulating capital. During recessions, agents invest less, and this generates noisier estimates of macroeconomic conditions and an increase in uncertainty. The endogenous increase in aggregate uncertainty further reduces economic activity and thus gives rise to a multiplier effect that amplifies aggregate fluctuations. To discipline learning dynamics, I parametrize the model so that it matches not only standard business cycle moments but also survey data on macroeconomic forecasts. I find that the uncertainty multiplier amplifies output standard deviation by 16%.

Suggested Citation

  • Saijo, Hikaru, 2017. "The uncertainty multiplier and business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 78(C), pages 1-25.
  • Handle: RePEc:eee:dyncon:v:78:y:2017:i:c:p:1-25
    DOI: 10.1016/j.jedc.2017.02.008
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    6. Francesco Bianchi & Howard Kung & Mikhail Tirskikh, 2018. "The Origins and Effects of Macroeconomic Uncertainty," NBER Working Papers 25386, National Bureau of Economic Research, Inc.
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    8. Ilut, Cosmin & Saijo, Hikaru, 2021. "Learning, confidence, and business cycles," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 354-376.
    9. Alexander W. Richter & Nathaniel A. Throckmorton, 2017. "A New Way to Quantify the Effect of Uncertainty," Working Papers 1705, Federal Reserve Bank of Dallas.
    10. John Stachurski & Junnan Zhang, 2019. "Dynamic Programming with State-Dependent Discounting," Papers 1908.08800, arXiv.org, revised Oct 2020.
    11. Moran, Kevin & Nono, Simplice Aimé, 2018. "Gradual learning about shocks and the forward premium puzzle," Journal of International Money and Finance, Elsevier, vol. 88(C), pages 79-100.
    12. Kaiwen Hou, 2023. "Adaptive Bayesian Learning with Action and State-Dependent Signal Variance," Papers 2311.12878, arXiv.org, revised Nov 2023.
    13. Jan-Philipp Dueber, 2018. "Endogenous Time-Varying Volatility and Emerging Market Business Cycles," Studies in Economics 1811, School of Economics, University of Kent.
    14. Joshua Bernstein & Michael D. Plante & Alexander W. Richter & Nathaniel A. Throckmorton, 2021. "Countercyclical Fluctuations in Uncertainty are Endogenous," Working Papers 2109, Federal Reserve Bank of Dallas.
    15. Thomas J. Sargent & John Stachurski, 2024. "Dynamic Programming: Finite States," Papers 2401.10473, arXiv.org.
    16. Ma, Xiaohan & Samaniego, Roberto, 2022. "Business cycle dynamics when neutral and investment-specific technology shocks are imperfectly observable," Journal of Mathematical Economics, Elsevier, vol. 101(C).

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