IMF Working Papers

Uncertainty, Financial Frictions and Nominal Rigidities: A Quantitative Investigation

By Ambrogio Cesa-Bianchi, Emilio Fernández Corugedo

September 29, 2017

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Ambrogio Cesa-Bianchi, and Emilio Fernández Corugedo. Uncertainty, Financial Frictions and Nominal Rigidities: A Quantitative Investigation, (USA: International Monetary Fund, 2017) accessed November 5, 2024

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Summary

Are uncertainty shocks a major source of business cycle fluctuations? This paper studies the effect of a mean preserving shock to the variance of aggregate total factor productivity (macro uncertainty) and to the dispersion of entrepreneurs' idiosyncratic productivity (micro uncertainty) in a financial accelerator DSGE model with sticky prices. It explores the different mechanisms through which uncertainty shocks are propagated and amplified. The time series properties of macro and micro uncertainty are estimated using U.S. aggregate and firm-level data, respectively. While surprise increases in micro uncertainty have a larger impact on output than macro uncertainty, these account for a small (non-trivial) share of output volatility.

Subject: Consumption, Credit, Labor, Money, National accounts, Prices, Production, Self-employment, Sticky prices, Total factor productivity

Keywords: Business cycle, Business cycles, Consumption, Credit, Credit frictions, Depreciation rate, Flex price economy, Inflation rate, Nominal interest rate, Nomi-nal price rigidity, Price stickiness, Self-employment, Standard deviation, Sticky prices, Taylor series, TFP innovation, TFP process, TFP shock, Total factor productivity, Transmission mechanism, Uncertainty, Uncertainty shock, Uncertainty shocks, WP

Publication Details

  • Pages:

    45

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2017/211

  • Stock No:

    WPIEA2017211

  • ISBN:

    9781484320723

  • ISSN:

    1018-5941