Structural Breaks in an Endogenous Growth Model
We study the effects of parameter uncertainty prompted by structural breaks. In our model, agents respond differently to uncertainty prompted by regime shifts in shock processes than they react to comparable perceived increases in shock volatility. The magnitude of the response to an increase in uncertainty about TFP associated with a structural break is greater than that of a response to a comparable perceived rise in volatility. This is because lifetime utility varies more when shocks shift beliefs and perceived wealth.
We thank the NSF and the C.V. Starr Center for support, F. Bianchi, R. Lucas, S. Ludvigson, V. Midrigan, P. Rousseau, L. Veldkamp and G. Violante for comments, and Gaston Navarro, Sai Ma, and Angelo Orane for assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.