Uncertainty Shocks in a Model of Effective Demand
TL;DR: The authors examined the role of uncertainty shocks in a one-sector, representative-agent dynamic stochastic general-equilibrium model and found that increased uncertainty about the future may indeed have played a signicant role in worsening the Great Recession.
Abstract: This paper examines the role of uncertainty shocks in a one-sector, representative-agent dynamic stochastic general-equilibrium model. When prices are exible, uncertainty shocks are not capable of producing business-cycle comovements among key macro variables. With countercyclical markups through sticky prices, however, uncertainty shocks can generate uctuations that are consistent with business cycles. Monetary policy usually plays a key role in osetting the negative impact of uncertainty shocks. If the central bank is constrained by the zero lower bound, then monetary policy can no longer perform its usual stabilizing function and higher uncertainty has even more negative eects on the economy. Calibrating the size of uncertainty shocks using uctuations in the VIX, we nd that increased uncertainty about the future may indeed have played a signicant role in worsening the Great Recession, which is consistent with statements by policymakers, economists, and the nancial press.
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TL;DR: In this paper, the authors study how unexpected changes in uncertainty about fiscal policy affect economic activity and find that unexpected change in fiscal volatility shocks can have a sizable adverse effect on economic activity.
Abstract: We study how unexpected changes in uncertainty about fiscal policy affect economic activity. First, we estimate tax and spending processes for the United States with time-varying volatility to uncover evidence of time-varying volatility. Second, we estimate a VAR for the US economy using the time-varying volatility found in the previous step. Third, we feed the tax and spending processes into an otherwise standard New Keynesian model. Both in the VAR and in the model, we find that unexpected changes in fiscal volatility shocks can have a sizable adverse effect on economic activity. An endogenous increase in markups is a key mechanism. (JEL E12, E23, E32, E52, E62)
487 citations
TL;DR: In this article, the authors use a heterogeneous-firm dynamic stochastic general equilibrium model, where firms face fixed capital adjustment costs and show that time-varying firm-level risk through "wait-and-see" dynamics is unlikely a major source of business cycle fluctuations.
284 citations
TL;DR: In this article, the authors estimate a nonlinear general equilibrium model where occasionally binding collateral constraints on housing wealth drive an asymmetry in the link between housing prices and economic activity, which is corroborated by evidence from state and MSA-level data.
247 citations
TL;DR: The authors employ a parsimonious nonlinear Interacted-VAR to examine whether the real effects of uncertainty shocks are greater when the economy is at the zero lower bound and find that the contractionary effects are statistically larger when the ZLB is binding, with differences that are economically important.
171 citations
01 May 2020
TL;DR: The labor impacts to the airline industry from uncertainty events are substantial and provide insight into the expected industry job loss from COVID-19.
Abstract: The purpose of this paper is to analyze the effects of uncertainty shocks on airline employment in the light of the current global pandemic. The airline industry has faced many threats throughout history, but none quite as rapid and severe as the one posed by the spread of COVID-19. One constant during uncertainty shocks and industry downturns is that airline labor bears the brunt of the decline. As the industry reduces capacity amid the increase in travel restrictions, the post-stimulus impacts to airline labor are not known. Using time series analysis, the dynamics of historical uncertainty shocks to the industry are examined. During periods of uncertainty shocks, the estimated job loss is nearly 7% of the airline workforce with an upper bound of over 13%. Major airline employment is most impacted, while low-cost and regional airline employment is least impacted. The hardest hit employees are ones related to passenger handling and flight operations, while management employees fair slightly better during these uncertain periods. Further, recovery following uncertainty shocks is estimated to take between 4 and 6 years. Overall, the labor impacts to the airline industry from uncertainty events are substantial and provide insight into the expected industry job loss from COVID-19.
169 citations
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TL;DR: In this article, the effect of financial structure on market valuations has been investigated and a theory of investment of the firm under conditions of uncertainty has been developed for the cost-of-capital problem.
Abstract: The potential advantages of the market-value approach have long been appreciated; yet analytical results have been meager. What appears to be keeping this line of development from achieving its promise is largely the lack of an adequate theory of the effect of financial structure on market valuations, and of how these effects can be inferred from objective market data. It is with the development of such a theory and of its implications for the cost-of-capital problem that we shall be concerned in this paper. Our procedure will be to develop in Section I the basic theory itself and to give some brief account of its empirical relevance. In Section II we show how the theory can be used to answer the cost-of-capital questions and how it permits us to develop a theory of investment of the firm under conditions of uncertainty. Throughout these sections the approach is essentially a partial-equilibrium one focusing on the firm and "industry". Accordingly, the "prices" of certain income streams will be treated as constant and given from outside the model, just as in the standard Marshallian analysis of the firm and industry the prices of all inputs and of all other products are taken as given. We have chosen to focus at this level rather than on the economy as a whole because it is at firm and the industry that the interests of the various specialists concerned with the cost-of-capital problem come most closely together. Although the emphasis has thus been placed on partial-equilibrium analysis, the results obtained also provide the essential building block for a general equilibrium model which shows how those prices which are here taken as given, are themselves determined. For reasons of space, however, and because the material is of interest in its own right, the presentation of the general equilibrium model which rounds out the analysis must be deferred to a subsequent paper.
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TL;DR: In this article, the authors present a model embodying moderate amounts of nominal rigidities that accounts for the observed inertia in inflation and persistence in output, and the key features of their model are those that prevent a sharp rise in marginal costs after an expansionary shock to monetary policy.
Abstract: We present a model embodying moderate amounts of nominal rigidities that accounts for the observed inertia in inflation and persistence in output. The key features of our model are those that prevent a sharp rise in marginal costs after an expansionary shock to monetary policy. Of these features, the most important are staggered wage contracts that have an average duration of three quarters and variable capital utilization.
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