The Common Origin of Uncertainty Shocks / Nicholas Kozeniauskas, Anna Orlik, Laura Veldkamp.

Format:

Book

Author/Creator:

Kozeniauskas, Nicholas.

Contributor:

National Bureau of Economic Research.

Orlik, Anna.

Veldkamp, Laura.

Series:

Working Paper Series (National Bureau of Economic Research) no. w22384.

NBER working paper series no. w22384

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2016.

Summary:

Various types of uncertainty shocks can explain many phenomena in macroeconomics and finance. But does this just amount to inventing new, exogenous, unobserved shocks to explain challenging features of business cycles? This paper argues that three conceptually distinct fluctuations, all called uncertainty shocks, have a common origin. Specifically, we propose a mechanism that generates micro uncertainty (uncertainty about firm-level shocks), macro uncertainty (uncertainty about aggregate shocks) and higher-order uncertainty (disagreement) shocks from a common origin and causes them to covary, just as they do in the data. When agents use standard maximum likelihood techniques and real-time data to re-estimate parameters that govern the probability of disasters, the result is that micro, macro and higher-order uncertainty fluctuate and covary just like their empirical counterparts. Our findings suggest that time-varying disaster risk and the many types of uncertainty shocks are not distinct phenomena. They are outcomes of a quantitatively plausible belief updating process.

Notes:

Print version record

July 2016.