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Why Does Risk Matter More in Recessions than in Expansions?

Publikation: Working paper/Preprint Working paperForskning

Dokumenter

  • wp21_12

    Forlagets udgivne version, 1,01 MB, PDF-dokument

This paper uses a nonlinear vector autoregression and a non-recursive identification strategy to show that an equal-sized uncertainty shock generates a larger contraction in real activity when growth is low (as in recessions) than when growth is high (as in expansions). An estimated New Keynesian model with recursive preferences and approximated to third order around its risky steady state replicates these state-dependent responses. The key mechanism behind this result is that firms display a stronger upward nominal pricing bias in recessions than in expansions, because recessions imply higher inflation volatility and higher marginal utility of consumption than expansions.
OriginalsprogEngelsk
UdgivelsesstedAarhus
UdgiverInstitut for Økonomi, Aarhus Universitet
Antal sider41
StatusUdgivet - 29 sep. 2021
SerietitelEconomics Working Papers
Nummer2021-12

    Forskningsområder

  • New Keynesian Model, Nonlinear SVAR, Non-recursive identification, State-dependent uncertainty shock, Risky steady state

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