DP13450 The Origins and Effects of Macroeconomic Uncertainty

Author(s): Francesco Bianchi, Howard Kung, Mikhail Tirskikh
Publication Date: January 2019
Keyword(s): Business Cycles, Term Structure of Interest Rates, time-varying risk premia, Uncertainty shocks
JEL(s): C11, C32, E32, G12
Programme Areas: Financial Economics, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13450

We construct and estimate a dynamic stochastic general equilibrium model that features demand- and supply-side uncertainty. Using term structure and macroeconomic data, we find sizable effects of uncertainty on risk premia and business cycle fluctuations. Both demand-side and supply-side uncertainty imply large contractions in real activity and an increase in term premia, but supply-side uncertainty has larger effects on inflation and investment. We introduce a novel analytical decomposition to illustrate how multiple distinct risk propagation channels account for these differences. Supply and demand uncertainty are strongly correlated in the beginning of our sample, but decouple in the aftermath of the Great Recession.