Policy Risk and the Business Cycle

Arbeitspapier

The argument that policy risk, i.e. uncertainty about monetary and fiscal policy, has been holding back the economic recovery in the U.S. during the Great Recession has a large popular appeal. We analyze the role of policy risk in explaining business cycle fluctuations by using an estimated New Keynesian model featuring policy risk as well as uncertainty about technology. We directly measure uncertainty from aggregate time series using Sequential Monte Carlo Methods. While we find considerable evidence of policy risk in the data, we show that the "pure uncertainty"-effect of policy risk is unlikely to play a major role in business cycle fluctuations. With the estimated model, output effects are relatively small due to i) dampening general equilibrium effects that imply a low amplification and ii) counteracting partial effects of uncertainty. Finally, we show that policy risk has effects that are an order of magnitude larger than the ones of uncertainty about aggregate TFP.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bonn Econ Discussion Papers ; No. 06/2011

Classification and Topics

• Classification: Wirtschaft ; Business Fluctuations; Cycles ; Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy ; Bayesian Analysis: General
• Subject: Policy Risk ; Uncertainty ; Aggregate Fluctuations ; Particle Filter ; General Equilibrium ; Konjunktur ; Wirtschaftskrise ; Geldpolitik ; Finanzpolitik ; Risiko ; Neukeynesianische Makroökonomik ; Allgemeines Gleichgewicht ; Theorie ; USA

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Born, Benjamin ; Peifer, Johannes
• Event: Veröffentlichung
• (who): University of Bonn, Bonn Graduate School of Economics (BGSE)
• (where): Bonn
• (when): 2011

Further information

• Handle: http://hdl.handle.net/10419/71887
• Last update: 10.03.2025, 11:43 AM CET