Uncertainty and the macroeconomy

Abstract

In this thesis, I study from various angles how uncertainty affects macroeconomic activity. Chapter 1 investigates the effects of uncertainty shocks on economic activity in the euro area by means of a Dynamic Stochastic General Equilibrium (DSGE) model with heterogenous agents and a stylized banking sector. We show that frictions in credit supply amplify the effects of uncertainty shocks on economic activity. This amplification channel stems mainly from the stickiness in bank loan rates. This stickiness reduces the effectiveness in the transmission mechanism of monetary policy. In chapter 2, I provide empirical evidence that uncertainty shocks have strong asymmetric effects on economic activity depending on the phase of the business cycle. In particular, the impulse responses estimated with the local projection method on a smooth-transition model show that in recessions uncertainty shocks strongly dampen economic activity. In an expansion, the effects are reversed, and uncertainty shocks have positive macroeconomic effects. One possible explanation is that during expansions uncertainty fosters investments and economic activity through the "growth options" channel, while in recessions it reduces investments via the "wait-and-see" channel. In chapter 3, I show that shocks to macroeconomic uncertainty negatively affect economic activity both in the short- and in the long-run. In a New Keynesian model with endogenous-growth through investment in R&D, volatility shocks have negative affects in the short-term because of precautionary savings, lower propensity to undertake risky investments and rising markups, and in the long-run because of the fall in R&D investment. The presence of long-run fluctuations in consumption makes agents more risk-averse, which strongly amplifies the affects of uncertainty shocks.