Uncertainty Shocks in a Model of Effective Demand: Comment
Basu and Bundick (2017) show a second moment intertemporal preference shock creates meaningful declines in output in a sticky price model with Epstein and Zin (1991) preferences. The result, however, rests on the way they model the shock. If a preference shock is included in Epstein-Zin preferences, the distributional weights on current and future utility must sum to 1, otherwise it creates an asymptote in the response to the shock with unit intertemporal elasticity of substitution. When we change the preferences so the weights sum to 1, the asymptote disappears as well as their main resultsâ€”uncertainty shocks generate small increases in output and comovement with consumption and investment that is at odds with the data. We examine three changes to the modelâ€”recalibration, a risk-premium shock, and a disaster risk-type shockâ€”to try and restore their results, but in all three cases the model is unable to match VAR evidence.
(This abstract was borrowed from another version of this item.)
|Date of creation:||19 May 2017|
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- Fernández-Villaverde, Jesús & Gordon, Grey & Guerrón-Quintana, Pablo & Rubio-Ramírez, Juan F., 2015.
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- Jesús Fernández-Villaverde & Grey Gordon & Pablo Guerrón-Quintana & Juan F. Rubio-Ramírez, 2012. "Nonlinear adventures at the zero lower bound," Working Papers 12-10, Federal Reserve Bank of Philadelphia.
- Fernández-Villaverde, Jesús & Gordon, Grey & Guerron-Quintana, Pablo A. & Rubio-Ramírez, Juan Francisco, 2012. "Nonlinear Adventures at the Zero Lower Bound," CEPR Discussion Papers 8972, C.E.P.R. Discussion Papers.
- Susanto Basu & Brent Bundick, 2011. "Uncertainty Shocks in a Model of Effective Demand," Boston College Working Papers in Economics 774, Boston College Department of Economics, revised 01 Nov 2015.
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- Susanto Basu & Brent Bundick, 2012. "Uncertainty Shocks in a Model of Effective Demand," NBER Working Papers 18420, National Bureau of Economic Research, Inc.
- Bundick, Brent & Basu, Susanto, 2014. "Uncertainty shocks in a model of effective demand," Research Working Paper RWP 14-15, Federal Reserve Bank of Kansas City, revised 01 Nov 2015.
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- Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 263-286, April. Full references (including those not matched with items on IDEAS)
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