Date: 2019
Type: Working Paper
The propagation of uncertainty shocks : Rotemberg vs. Calvo
Working Paper, EUI ECO, 2019/01
OH, Joonseok, The propagation of uncertainty shocks : Rotemberg vs. Calvo, EUI ECO, 2019/01 - https://hdl.handle.net/1814/63144
Retrieved from Cadmus, EUI Research Repository
This paper studies the effects of uncertainty shocks on economic activity, focusing on inflation. Using a VAR, I show that increased uncertainty has negative demand effects, reducing GDP and prices. I then consider standard New Keynesian models with Rotemberg-type and Calvo-type price rigidities. Despite the belief that the two schemes are equivalent, I show that they generate different dynamics in response to uncertainty shocks. In the Rotemberg model, uncertainty shocks decrease output and inflation, in line with the empirical results. By contrast, in the Calvo model, uncertainty shocks decrease output but raise inflation because of firms' precautionary pricing motive.
Cadmus permanent link: https://hdl.handle.net/1814/63144
ISSN: 1725-6704
Series/Number: EUI ECO; 2019/01
Keyword(s): Uncertainty shocks Inflation Rotemberg pricing Calvo pricing C68 E31 E32
Succeeding version: http://hdl.handle.net/1814/64465