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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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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
Date of revision:
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. 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.
  2. 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.
  3. Valerie A. Ramey, 2009. "Identifying Government Spending Shocks: It's All in the Timing," NBER Working Papers 15464, National Bureau of Economic Research, Inc.
  4. Matthias Kehrig, 2011. "The Cyclicality of Productivity Dispersion," Working Papers 11-15, Center for Economic Studies, U.S. Census Bureau.
  5. Christiano, Lawrence & Rostagno, Massimo & Motto, Roberto, 2010. "Financial factors in economic fluctuations," Working Paper Series 1192, European Central Bank.
  6. Lawrence J. Christiano & Joshua M. Davis, 2006. "Two flaws in business cycle dating," Working Paper 0612, Federal Reserve Bank of Cleveland.
  7. Justiniano, Alejandro & Primiceri, Giorgio E & Tambalotti, Andrea, 2009. "Investment Shocks and the Relative Price of Investment," CEPR Discussion Papers 7598, C.E.P.R. Discussion Papers.
  8. 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.
  9. Christiano, Lawrence & Ilut, Cosmin & Motto, Roberto & Rostagno, Massimo, 2011. "Monetary Policy and Stock Market Booms," Working Papers 2011-005, Banco Central de Reserva del Perú.
  10. Lawrence Christiano & Daisuke Ikeda, 2014. "Leverage Restrictions in a Business Cycle Model," Working Papers Central Bank of Chile 726, Central Bank of Chile.
  11. Pablo N D’Erasmo & Hernan J Moscoso-Boedo, 2011. "Intangibles and Endogenous Firm Volatility over the Business Cycle," Virginia Economics Online Papers 400, University of Virginia, Department of Economics.
  12. 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.
  13. Joseph S. Vavra, 2013. "Inflation Dynamics and Time-Varying Volatility: New Evidence and an Ss Interpretation," NBER Working Papers 19148, National Bureau of Economic Research, Inc.
  14. 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.
  15. 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.
  16. 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.
  17. Saki Bigio, 2012. "Financial Risk Capacity," 2012 Meeting Papers 97, Society for Economic Dynamics.
  18. Furlanetto, Francesco & Seneca, Martin, 2014. "Investment shocks and consumption," European Economic Review, Elsevier, vol. 66(C), pages 111-126.
  19. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
  20. Schmitt-Grohé, Stephanie & Uribe, Martín, 2009. "What’s News in Business Cycles," CEPR Discussion Papers 7201, C.E.P.R. Discussion Papers.
  21. Michelle Alexopoulos, 2010. "Read All About it!! What happens following a technology shock?," Working Papers tecipa-391, University of Toronto, Department of Economics.
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