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Are Uncertainty Shocks Aggregate Demand Shocks?

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  • 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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    References listed on IDEAS

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    3. Efrem Castelnuovo, 2022. "Uncertainty Before and During COVID-19: A Survey," "Marco Fanno" Working Papers 0279, Dipartimento di Scienze Economiche "Marco Fanno".
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    6. OH, Joonseok; ROGANTINI PICCO, Anna, 2019. "Macro uncertainty and unemployment risk," Economics Working Papers ECO 2019/02, European University Institute.
    7. Choi Sangyup & Yoon Chansik, 2022. "Uncertainty, Financial Markets, and Monetary Policy over the Last Century," The B.E. Journal of Macroeconomics, De Gruyter, vol. 22(2), pages 397-434, June.
    8. Chan, Ying Tung & Dong, Yilin, 2022. "How does oil price volatility affect unemployment rates? A dynamic stochastic general equilibrium model," Economic Modelling, Elsevier, vol. 114(C).
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    10. Ambrocio, Gene, 2020. "Inflationary household uncertainty shocks," Research Discussion Papers 5/2020, Bank of Finland.
    11. Beckmann, Joscha & Czudaj, Robert L., 2024. "Uncertainty Shocks and Inflation: The Role of Credibility and Expectation Anchoring," MPRA Paper 119971, University Library of Munich, Germany.
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    13. Josué Diwambuena & Jean-Paul K. Tsasa, 2021. "The Real Effects of Uncertainty Shocks: New Evidence from Linear and Nonlinear SVAR Models," BEMPS - Bozen Economics & Management Paper Series BEMPS87, Faculty of Economics and Management at the Free University of Bozen.
    14. Arbex, Marcelo & Caetano, Sidney & Correa, Wilson, 2019. "Macroeconomic effects of inflation target uncertainty shocks," Economics Letters, Elsevier, vol. 181(C), pages 111-115.
    15. Canh Phuc Nguyen & Su Dinh Thanh & Bach Nguyen, 2022. "Economic uncertainty and tourism consumption," Tourism Economics, , vol. 28(4), pages 920-941, June.
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    17. Mario Canales & Bernabe Lopez-Martin, 2021. "Uncertainty, Risk, and Price-Setting: Evidence from CPI Microdata," Working Papers Central Bank of Chile 908, Central Bank of Chile.
    18. Pintér, Gábor, 2023. "Inflation and uncertainty in New Keynesian models: A note," Economics Letters, Elsevier, vol. 222(C).
    19. OH, Joonseok, 2019. "The propagation of uncertainty shocks : Rotemberg vs. Calvo," Economics Working Papers ECO 2019/01, European University Institute.
    20. Ambrocio, Gene, 2020. "Inflationary household uncertainty shocks," Bank of Finland Research Discussion Papers 5/2020, Bank of Finland.
    21. 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.
    22. Angeliki Theophilopoulou, 2022. "The impact of macroeconomic uncertainty on inequality: An empirical study for the United Kingdom," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(4), pages 859-884, June.
    23. Valeriu Nalban & Andra Smadu, 2022. "Uncertainty shocks and the monetary-macroprudential policy mix," Working Papers 739, DNB.
    24. Bach Nguyen & Christophe Schinckus & Nguyen Phuc Canh & Su Dinh Thanh, 2021. "Economic Policy Uncertainty and Entrepreneurship: A Bad for a Good?," Journal of Entrepreneurship and Innovation in Emerging Economies, Entrepreneurship Development Institute of India, vol. 30(1), pages 81-133, March.
    25. Kumar, Abhishek & Mallick, Sushanta & Sinha, Apra, 2021. "Is uncertainty the same everywhere? Advanced versus emerging economies," Economic Modelling, Elsevier, vol. 101(C).

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    More about this item

    Keywords

    Uncertainty Shocks; DSGE Model; Search and Matching frictions; Taylor rules; In?flation Dynamics;
    All these keywords.

    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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