Adverse Selection, Uncertainty Shocks and Business Cycles

This paper exploits a data rich environment to provide direct econometric estimates of time-varying macroeconomic uncertainty. Our estimates display significant independent variations from popular uncertainty proxies, suggesting that much of the variation in the proxies is not driven by uncertainty. Quantitatively important uncertainty episodes appear far more infrequently than indicated by popular uncertainty proxies, but when they do occur, they are larger, more persistent, and are more correlated with real activity. Our estimates provide a benchmark to evaluate theories for which uncertainty shocks play a role in business cycles. (JEL C53, D81, E32, G12, G35, L25)

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Uncertainty‐driven business cycles: Assessing the markup channel

Quantitative Economics ◽

10.3982/qe1297 ◽

2021 ◽

Vol 12 (2) ◽

pp. 587-623 ◽

Cited By ~ 1

Author(s):

Benjamin Born ◽

Johannes Pfeifer

Keyword(s):

Theoretical Model ◽

Business Cycles ◽

Dsge Models ◽

Impulse Responses ◽

Wage Setting ◽

Times Series ◽

Uncertainty Shocks ◽

The Standard Model ◽

Model Channel ◽

Negative Output

Precautionary pricing and increasing markups in representative‐agent DSGE models with nominal rigidities are commonly used to generate negative output effects of uncertainty shocks. We assess whether this theoretical model channel is consistent with the data. Three things stand out. First, consistent with precautionary wage setting, we find that wage markups increase after uncertainty shocks. Second, the impulse responses of price markups are largely inconsistent with the standard model, both at the aggregate as well as the industry level. Finally, and in contrast to times‐series evidence, our theoretical model robustly predicts that uncertainty shocks have a quantitatively small impact on the economy.

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Adverse selection and self-fulfilling business cycles

Journal of Monetary Economics ◽

10.1016/j.jmoneco.2017.12.003 ◽

2018 ◽

Vol 94 ◽

pp. 114-130 ◽

Cited By ~ 10

Author(s):

Jess Benhabib ◽

Feng Dong ◽

Pengfei Wang

Keyword(s):

Business Cycles ◽

Adverse Selection

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Uncertainty, agency costs and investment behavior in the Euro area and in the USA

Journal of Asian Business and Economic Studies ◽

10.1108/jabes-04-2018-0007 ◽

2018 ◽

Vol 25 (1) ◽

pp. 122-143

Author(s):

Johannes Strobel ◽

Kevin D. Salyer ◽

Gabriel S. Lee

Keyword(s):

Business Cycles ◽

Euro Area ◽

Risk Premium ◽

Agency Cost ◽

Investment Behavior ◽

Credit Channel ◽

Content Type ◽

Uncertainty Shocks ◽

The Us ◽

The Usa

Purpose The purpose of this paper is to analyze the credit channel effects on investment behavior for the US and the Euro area. Design/methodology/approach This paper uses the dynamic stochastic general equilibrium model and calibrates a version of the Carlstrom and Fuerst’s (1997) agency cost model of business cycles with time-varying uncertainty in the technology shocks that affect capital production. To highlight the differences between the US and European financial sectors, the paper focuses on two key components of the lending channel: the risk premium associated with bank loans and the bankruptcy rates. Findings This paper shows that the effects of minor differences in the credit market translate into large, persistent and asymmetric fluctuations in real and financial variables and depend on the type of shocks. The results imply that the Euro areas supply elasticities for capital are less elastic than that of the USA following a technology shock. Finally, the authors find that the adverse impact of uncertainty shocks is heterogeneous across countries and amplified by the steady-state bankruptcy rate and risk premium. Originality/value This paper quantifies the effects of uncertainty shocks when there is a credit channel due to asymmetric information between lenders and borrowers for the Euro area countries, and then compares the results to that of the USA. This paper shows that financial accelerator mechanism could potentially play a significant role in business cycles in the Euro area. This result directly lends one to conclude the following: the credit channel that affects the financial sector does indeed matter for macroeconomic behavior, and that policy makers should be attentive in smoothing out uncertainties if the economic policies are to lower the business and financial cycle volatilities.

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