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Policy risk and the business cycle

Listed author(s):
  • Born, Benjamin
  • Pfeifer, Johannes

The argument that uncertainty about monetary and fiscal policy has been holding back the recovery in the U.S. during the Great Recession has a large popular appeal. This paper uses an estimated New Keynesian model to analyze the role of policy risk in explaining business cycles. We directly measure risk from aggregate data and find a moderate amount of time-varying policy risk. The “pure uncertainty” effect of this policy risk is unlikely to play a major role in business cycle fluctuations. In the estimated model, output effects are relatively small because policy risk shocks are (i) too small and (ii) not sufficiently amplified.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 68 (2014)
Issue (Month): C ()
Pages: 68-85

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Handle: RePEc:eee:moneco:v:68:y:2014:i:c:p:68-85
DOI: 10.1016/j.jmoneco.2014.07.012
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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