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Black Swans and the Many Shades of Uncertainty

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  • Laura Veldkamp

    (NYU Stern)

  • Anna Orlik

    (Federal Reserve Board of Governors)

  • Nicholas Kozeniauskas

    (New York University)

Abstract

Various types of uncertainty shocks can explain many phenomena in macroeconomics and finance. But does this amount to throwing in a new, exogenous, unobserved shock to explain every challenging feature of business cycles? This paper explores the origin of micro uncertainty (uncertainty about firm-level shocks), macro uncertainty (uncertainty about aggregate shocks) and higher-order uncertainty shocks (disagreement) in a unified econometric framework. When agents use standard econometric techniques and real-time data to re-estimate parameters that govern the probability of black swans (unobserved extreme events), micro, macro and higher-order uncertainty covary just like their empirical counterparts. The results teach us that time-varying disaster risk and the many shades of uncertainty shocks are not distinct phenomena. All originate from using macro data to re-estimate the true probability distribution of economic outcomes.

Suggested Citation

  • Laura Veldkamp & Anna Orlik & Nicholas Kozeniauskas, 2015. "Black Swans and the Many Shades of Uncertainty," 2015 Meeting Papers 677, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:677
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    References listed on IDEAS

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    1. Susanto Basu & Brent Bundick, 2017. "Uncertainty Shocks in a Model of Effective Demand," Econometrica, Econometric Society, vol. 85, pages 937-958, May.
    2. Ryan A. Decker & Pablo N. D'Erasmo & Hernan Moscoso Boedo, 2016. "Market Exposure and Endogenous Firm Volatility over the Business Cycle," American Economic Journal: Macroeconomics, American Economic Association, pages 148-198.
    3. Michael Keane & Richard Rogerson, 2015. "Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 89-117, August.
    4. Michael Keane & Richard Rogerson, 2015. "Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 89-117, 08.
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