Uncertainty Shocks and Business Cycle Research
We review the literature on uncertainty shocks and business cycle research. First, we motivate the study of uncertainty shocks by documenting the presence of time-variation in the volatility of macroeconomic time series. Second, we enumerate the mechanisms that researchers have postulated to link uncertainty shocks and business cycles. Third, we outline how we can specify uncertainty shocks. Fourth, we postulate a real business cycle model augmented with financial frictions and uncertainty shocks. Fifth, we use the model to illustrate our previous discussions and to show how uncertainty shocks can be expansionary.
Ryan Zalla provided most timely research assistance. We thank Ryo Jinnai for extensive discussions and feedback on models with financial frictions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.