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Uncertainty, Financial Frictions, and Nominal Rigidities: A Quantitative Investigation

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  • AMBROGIO CESA‐BIANCHI
  • EMILIO FERNANDEZ‐CORUGEDO

Abstract

Are uncertainty shocks a major source of business cycle fluctuations? This paper studies the effect of a mean preserving shock to the variance of aggregate total factor productivity (macro‐uncertainty) and to the dispersion of entrepreneurs' idiosyncratic productivity (micro‐uncertainty) in a financial accelerator dynamic stochastic general equilibrium model with sticky prices. It explores the different mechanisms through which uncertainty shocks are propagated and amplified. The time‐series properties of macro‐ and micro‐uncertainty are estimated using U.S. aggregate and firm‐level data, respectively. While surprise increases in micro‐uncertainty have a larger impact on total output than macro‐uncertainty, these can only account for a small (but nontrivial) share of output volatility.

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  • Ambrogio Cesa‐Bianchi & Emilio Fernandez‐Corugedo, 2018. "Uncertainty, Financial Frictions, and Nominal Rigidities: A Quantitative Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(4), pages 603-636, June.
    • Handle: RePEc:wly:jmoncb:v:50:y:2018:i:4:p:603-636
    DOI: 10.1111/jmcb.12505
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