Arbeitspapier

Why Does Risk Matter More in Recessions than in Expansions?

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.

Language
Englisch

Bibliographic citation
Series: CESifo Working Paper ; No. 9328

Classification
Wirtschaft
Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
Business Fluctuations; Cycles
Subject
New Keynesian model
nonlinear SVAR
non-recursive identification
state-dependent uncertainty shock
risky steady state

Event
Geistige Schöpfung
(who)
Andreasen, Martin M.
Caggiano, Giovanni
Castelnuovo, Efrem
Pellegrino, Giovanni
Event
Veröffentlichung
(who)
Center for Economic Studies and ifo Institute (CESifo)
(where)
Munich
(when)
2021

Handle
Last update
10.03.2025, 11:46 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Andreasen, Martin M.
  • Caggiano, Giovanni
  • Castelnuovo, Efrem
  • Pellegrino, Giovanni
  • Center for Economic Studies and ifo Institute (CESifo)

Time of origin

  • 2021

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