Search Results
Working Paper
Countercyclical Fluctuations in Uncertainty are Endogenous
This paper uses a battery of calibrated and estimated structural models to determine the causal drivers of the negative correlation between output and aggregate uncertainty. We find the transmission of uncertainty shocks to output is weak, while aggregate uncertainty endogenously responds to first moment shocks in the presence of labor market search frictions. This indicates that countercyclical movements in aggregate uncertainty are endogenous responses to changes in output, rather than exogenous impulses. A vector autoregression on simulated data shows recursive identification techniques do ...
The Production Process Drives Fluctuations in Output and Uncertainty
If economic developments drive most of the changes in uncertainty—rather than the reverse—then the direct effect of a change in uncertainty on economic activity is much smaller than previous research has shown.
Working Paper
Uncertainty Shocks in a Model of Effective Demand: Comment
Basu and Bundick (2017) show a second moment intertemporal preference shock creates meaningful declines in output in a sticky price model with Epstein and Zin (1991) preferences. The result, however, rests on the way they model the shock. If a preference shock is included in Epstein-Zin preferences, the distributional weights on current and future utility must sum to 1, otherwise it creates an asymptote in the response to the shock with unit intertemporal elasticity of substitution. When we change the preferences so the weights sum to 1, the asymptote disappears as well as their main ...
Entry, Exit of Firms Amplify the Business Cycle
When new businesses are created, they generate new jobs. When unprofitable businesses close, employees lose their jobs. Given the connection between firm entry and exit and changes in employment, it is natural to ask how this entry and exit affects the broader business cycle.
Journal Article
Fed’s Effective Lower Bound Constraint on Monetary Policy Created Uncertainty
Uncertainty about the economy increased when the Fed reduced the federal funds rate to its effective lower bound because the constraint restricted the Fed?s ability to stabilize the economy. As a result, a much stronger negative relationship between uncertainty and economic activity emerged during and shortly after the Great Recession.
Working Paper
Entry and Exit, Unemployment, and Macroeconomic Tail Risk
This paper builds a nonlinear business cycle model with endogenous firm entry and exit and equilibrium unemployment. The entry and exit mechanism generates asymmetry and amplifies the transmission of productivity shocks, exposing the economy to significant tail risk. When calibrating the rates of entry and exit to match their shares of job creation and destruction, our quantitative model generates higher-order moments consistent with U.S. data. Firm exit particularly amplifies the severity and persistence of deep recessions such as the COVID-19 crisis. In the absence of entry and exit, the ...
Working Paper
Nonlinear Search and Matching Explained
Competing explanations for the sources of nonlinearity in search and matching modelsindicate that they are not fully understood. This paper derives an analytical solution to atextbook model that highlights the mechanisms that generate nonlinearity and quantifiestheir contributions. Procyclical variation in the matching elasticity creates nonlinearity inthe job finding rate, which interacts with the law of motion for unemployment. These resultsshow the matching function choice is not innocuous. Quantitatively, the Den Haan et al.(2000) matching function more than doubles the skewness of ...
Working Paper
The zero lower bound and endogenous uncertainty
This paper documents a strong negative correlation between macroeconomic uncertainty and real GDP growth since the Great Recession. Prior to that event the correlation was weak, even when conditioning on recessions. At the same time, many central banks reduced their policy rate to its zero lower bound (ZLB), which we contend contributed to the strong correlation between macroeconomic uncertainty and real GDP growth. To test that theory, we use a model where the ZLB occasionally binds. The model roughly matches the correlation in the data?away from the ZLB the correlation is weak but strongly ...
Job vacancy, unemployment relationship clouds ‘soft landing’ prospects
Some economists have argued that because the job vacancy rate has been well above its prepandemic level, there is plenty of room for vacancies to fall before the unemployment rate must rise.
Working Paper
Entry and Exit, Unemployment, and the Business Cycle
Establishment entry and exit is strongly correlated with output and unemployment. This paper examines how these linkages affect business cycle dynamics through the lens of a search and matching model augmented to include multi-worker establishments that endogenously enter and exit. Analytical results show cyclical entry and exit cause reallocation of inputs that amplifies and skews business cycle dynamics. When the model is calibrated to the data, it generates realistic asymmetry in output and unemployment, data-consistent counter-cyclical endogenous uncertainty and a 55% higher welfare cost ...