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Are Uncertainty Shocks Aggregate Demand Shocks?

Author

Listed:
  • Stefano Fasani

    () (University of Milan Bicocca)

  • Lorenza Rossi

    () (Department of Economics and Management, University of Pavia)

Abstract

This note considers the Leduc and Liu (JME, 2016) model and studies the effects of their uncertainty shock under different Taylor-types rules. It shows that both the responses of real and nominal variables highly depend on the Taylor rule considered. Remarkably,in?flation reacts positively so that uncertainty shocks look more like supply shocks, once an empirically plausible degree of interest rate smoothness is taken into account. This result is reinforced with less reactive monetary rules. Overall, these rules bring about a less severe recession.

Suggested Citation

  • Stefano Fasani & Lorenza Rossi, 2018. "Are Uncertainty Shocks Aggregate Demand Shocks?," DEM Working Papers Series 148, University of Pavia, Department of Economics and Management.
  • Handle: RePEc:pav:demwpp:demwp0148
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    File URL: http://dem-web.unipv.it/web/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0148.pdf
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    References listed on IDEAS

    as
    1. Lawrence J. Christiano & Martin S. Eichenbaum & Mathias Trabandt, 2016. "Unemployment and Business Cycles," Econometrica, Econometric Society, vol. 84, pages 1523-1569, July.
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    Citations

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    Cited by:

    1. Meinen, Philipp & Roehe, Oke, 2018. "To sign or not to sign? On the response of prices to financial and uncertainty shocks," Economics Letters, Elsevier, vol. 171(C), pages 189-192.
    2. OH, Joonseok; ROGANTINI PICCO, Anna, 2019. "Macro uncertainty and unemployment risk," Economics Working Papers ECO 2019/02, European University Institute.
    3. Sangyup Choi & Chansik Yoon, 2019. "Uncertainty, Financial Markets, and Monetary Policy over the Last Century," Working papers 2019rwp-142, Yonsei University, Yonsei Economics Research Institute.
    4. Arbex, Marcelo & Caetano, Sidney & Correa, Wilson, 2019. "Macroeconomic effects of inflation target uncertainty shocks," Economics Letters, Elsevier, vol. 181(C), pages 111-115.
    5. OH, Joonseok, 2019. "The propagation of uncertainty shocks : Rotemberg vs. Calvo," Economics Working Papers ECO 2019/01, European University Institute.
    6. Marcelo Arbex & Michael Batu & Sidney Caetano, 2020. "Stay At Home! Macroeconomic Effects of Pandemic-Induced Job Separation Shocks," Working Papers 2002, University of Windsor, Department of Economics.
    7. Ambrocio, Gene, 2020. "Inflationary household uncertainty shocks," Research Discussion Papers 5/2020, Bank of Finland.

    More about this item

    Keywords

    Uncertainty Shocks; DSGE Model; Search and Matching frictions; Taylor rules; In?flation Dynamics;

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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