The long-run effects of uncertainty shocks
Title: The long-run effects of uncertainty shocks
Series/Number: Bank of England Staff; Working Paper; 2019/802
External link: https://www.bankofengland.co.uk/working-paper/2019/the-long-run-effects-of-uncertainty-shocks
This paper argues that shocks increasing macroeconomic uncertainty negatively affect economic activity not only in the short but also in the long run. In a sticky-price DSGE model with endogenous growth through investment in R&D, uncertainty shocks lead to a short-term fall in demand because of precautionary savings and rising markups. The decline in the utilised aggregate stock of R&D determines a fall in productivity, which causes a long-term decline in the main macroeconomic aggregates. When households feature Epstein-Zin preferences, they become averse to these long-term risks affecting their consumption process (long-run risk channel), which strongly exacerbates the precautionary savings motive and the overall negative effects of uncertainty shocks.
Subject: Uncertainty shocks; R&D; Endogenous growth; E32; O40
Type of Access: openAccess