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Risk Shocks

  • Lawrence Christiano
  • Roberto Motto
  • Massimo Rostagno

We augment a standard monetary DSGE model to include a Bernanke-Gertler-Gilchrist financial accelerator mechanism. We fit the model to US data, allowing the volatility of cross-sectional idiosyncratic uncertainty to fluctuate over time. We refer to this measure of volatility as 'risk'. We find that fluctuations in risk are the most important shock driving the business cycle.

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File URL: http://www.nber.org/papers/w18682.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18682.

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Date of creation: Jan 2013
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Publication status: published as Christiano, Lawrence J., Roberto Motto, and Massimo Rostagno. 2014. "Risk Shocks." American Economic Review, 104(1): 27-65.
Handle: RePEc:nbr:nberwo:18682
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  1. Lawrence Christiano & Daisuke Ikeda, 2013. "Leverage Restrictions in a Business Cycle Model," NBER Working Papers 18688, National Bureau of Economic Research, Inc.
  2. Lawrence Christiano & Cosmin L. Ilut & Roberto Motto & Massimo Rostagno, 2010. "Monetary Policy and Stock Market Booms," NBER Working Papers 16402, National Bureau of Economic Research, Inc.
  3. Christiano, Lawrence & Rostagno, Massimo & Motto, Roberto, 2010. "Financial factors in economic fluctuations," Working Paper Series 1192, European Central Bank.
  4. Christiano, Lawrence J. & Trabandt, Mathias & Walentin, Karl, 2010. "DSGE Models for Monetary Policy Analysis," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 7, pages 285-367 Elsevier.
  5. Furlanetto, Francesco & Seneca, Martin, 2014. "Investment shocks and consumption," European Economic Review, Elsevier, vol. 66(C), pages 111-126.
  6. Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999. "Optimal Monetary Policy with Staggered Wage and Price Contracts," Computing in Economics and Finance 1999 1151, Society for Computational Economics.
  7. Lawrence J. Christiano & Joshua M. Davis, 2006. "Two flaws in business cycle dating," Working Paper 0612, Federal Reserve Bank of Cleveland.
  8. Valerie A. Ramey, 2011. "Identifying Government Spending Shocks: It's all in the Timing," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 1-50.
  9. Charles T. Carlstrom & Timothy S. Fuerst, 1996. "Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis," Working Paper 9602, Federal Reserve Bank of Cleveland.
  10. Emmanuel De Veirman & Andrew T. Levin, 2011. "Cyclical Changes in Firm Volatility," CAMA Working Papers 2011-29, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  11. Michelle Alexopoulos, 2004. "Read All About it: What happens following a technology shock," 2004 Meeting Papers 56, Society for Economic Dynamics.
  12. Alejandro Justiniano & Giorgio Primiceri & Andrea Tambalotti, 2011. "Investment Shocks and the Relative Price of Investment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 101-121, January.
  13. Saki Bigio, 2012. "Financial Risk Capacity," 2012 Meeting Papers 97, Society for Economic Dynamics.
  14. Stephanie Schmitt-Grohe & Martin Uribe, 2008. "What's News in Business Cycles," NBER Working Papers 14215, National Bureau of Economic Research, Inc.
  15. Jonas D.M. Fisher, 1998. "Credit market imperfections and the heterogeneous response of firms to monetary shocks," Working Paper Series, Macroeconomic Issues 96-23, Federal Reserve Bank of Chicago.
  16. Williamson, Stephen D, 1987. "Financial Intermediation, Business Failures, and Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1196-1216, December.
  17. Hernan Moscoso Boedo & Pablo D'Erasmo, 2013. "Intangibles and Endogenous Firm Volatility over the Business Cycle," 2013 Meeting Papers 97, Society for Economic Dynamics.
  18. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
  19. Matthias Kehrig, 2011. "The Cyclicality of Productivity Dispersion," Working Papers 11-15, Center for Economic Studies, U.S. Census Bureau.
  20. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
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