Browsing by Subject "Uncertainty"

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  • Isoré, Marlène; Szczerbowicz, Urszula (2017)
    Journal of Economic Dynamics and Control 1 June
    CEPII Working Paper N°2015-16, September 2015
    In RBC models, disaster risk shocks reproduce countercyclical risk premia but generate an increase in consumption along the recession and asset price fall, through their effects on agents’ preferences (Gourio, 2012). This paper offers a solution to this puzzle by developing a New Keynesian model with such a small but time-varying probability of “disaster”. We show that price stickiness, combined with an EIS smaller than unity, restores procyclical consumption and wages, while preserving countercyclical risk premia, in response to disaster risk shocks. The mechanism then provides a rationale for discount factor first- and second-moment (“uncertainty”) shocks.
  • Oinonen, Sami; Virén, Matti (2021)
    Economia Internazionale / International Economics 2
    Published in BoF DP 24/2018 http://urn.fi/URN:NBN:fi:bof-201811202136
    In this paper, we examine how professional forecasters’ expectations and expectation uncertainty have reacted to the ECB’s interest rate and non-conventional monetary policy decisions during the period 1999-2017. The analysis makes use of a conventional intervention dummy -type set up. The results indicate that expectations have been sensitive to policy actions, but forecasters’ reactions are quite different and, as a rule, do not seem to follow the predictions of a standard New Keynesian model. Also the relationship between inflation and output forecasts does not seem to follow a Phillips curve relationship. Rather, the forecasters interpret policy actions as signals of ECB’s inside information. Thus, for instance, cuts in policy rates are interpreted as the CB’s information of worse than generally assumed cyclical situation rather than the eventual positive effects of lower interest rates. The magnitude of expectation effects depends much of the way in which other macro variables are controlled. Even so the basic feature of these effects remain the same.
  • Oinonen, Sami; Paloviita, Maritta; Viren, Matti (2018)
    Bank of Finland Research Discussion Papers 24/2018
    Published in Economia Internazionale / International Economics 2 ; 2021.
    In this paper, we examine how professional forecasters’ expectations and expectation uncertainty have reacted to the ECB’s interest rate decisions and non-conventional monetary policy measures during the period 1999-2017. The analysis makes use of a conventional dif-in-dif type set up with different time series tools. The results indicate that expectations have been sensitive to policy actions, but all forecasters’ reactions do not seem to follow the basic predictions of a standard New Keynesian model. Also the relationship between inflation and output forecasts does not seem to follow a Phillips curve type relationship. Moreover, short- and long term reactions to policy are often weakly related and of different sign. Interestingly, subjective forecast uncertainty measures are very sensitive to policy measures. Thus, there seems to be much heterogeneity in forecasters’ reactions to most policy decisions. All uncertainty measures, including long-term inflation uncertainty, have increased over time. This has to be taken into account when considering the anchoring of inflation expectations to the inflation target.
  • Brand, Thomas; Isoré, Marlène; Tripier, Fabien (2019)
    Journal of Economic Dynamics and Control February
    Published in Bank of Finland Research Discussion Papers 34/2017.
    We develop a business cycle model where endogenous firm creation stems from two credit market frictions. First, entrepreneurs search for a lending relationship with a bank. Second, an optimal debt contract with monitoring is implemented. We analyze the interplay between both frictions, and embed it into an otherwise standard business cycle model which we estimate with Bayesian techniques. We find that uncertainty shocks are a prime contributor to business cycle fluctuations in the US, not only for macro-financial aggregates but also for firm creation. Moreover, we point out that the credit search friction dampens the financial accelerator mechanism because default may imply the end of the lending relationship.