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Uncertainty Shocks in a Model of Effective Demand: Reply

Author

Listed:
  • Basu, Susanto
  • Bundick, Brent

    () (Federal Reserve Bank of Kansas City)

Abstract

de Groot, Richter, and Throckmorton (2018) argue that the model in Basu and Bundick (2017) can match the empirical evidence only because the model assumes an asymptote in the economy’s response to an uncertainty shock. In this Reply, we provide new results showing that our model’s ability to match the data does not rely either on assuming preferences that imply an asymptote nor on a particular value of the intertemporal elasticity of substitution. We demonstrate that shifting to preferences that are not vulnerable to the Comment’s critique does not change our previous conclusions about the propagation of uncertainty shocks to macroeconomic outcomes.

Suggested Citation

  • Basu, Susanto & Bundick, Brent, 2018. "Uncertainty Shocks in a Model of Effective Demand: Reply," Research Working Paper RWP 18-5, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:rwp18-05
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    File URL: https://doi.org/10.18651/RWP2018-05
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    Keywords

    Uncertainty shocks; Monetary policy; Sticky-price models;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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