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A New Way to Quantify the Effect of Uncertainty

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This paper develops a new method to quantify the effects of uncertainty using estimates from a nonlinear New Keynesian model. The model includes an occasionally binding zero lower bound constraint on the nominal interest rate, which creates time-varying endogenous uncertainty, and two exogenous types of time-varying uncertainty—a volatility shock to technology growth and a volatility shock to the risk premium. A filtered third-order approximation of the Euler equation shows consumption uncertainty on average reduced consumption by about 0.06% and the peak effect was 0.15% during the Great Recession. Other higher-order moments such as inflation uncertainty, technology growth uncertainty, consumption skewness, and inflation skewness had smaller

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File URL: https://www.dallasfed.org/~/media/documents/research/papers/2017/wp1705.pdf
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Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 1705.

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Length: 35 pages
Date of creation: 04 May 2017
Handle: RePEc:fip:feddwp:1705
DOI: 10.24149/wp1705
Contact details of provider: Web page: http://www.dallasfed.org/
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