## Uncertainty, Financial Frictions and Nominal Rigidities: A Quantitative Investigation

_IMF Working Papers, September 29, 2017_

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## Bibliographic details
- Authors: Ambrogio Cesa-Bianchi, Emilio Fernández Corugedo
- Published: September 29, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484320723.001

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### Summary
- Research question: Are uncertainty shocks a major source of business cycle fluctuations?
- Study focus: Effects of a mean preserving shock to the variance of aggregate total factor productivity (macro uncertainty) and to the dispersion of entrepreneurs' idiosyncratic productivity (micro uncertainty) in a financial accelerator DSGE model with sticky prices.
- Main conclusion: Surprise increases in micro uncertainty have a larger impact on output than macro uncertainty, but these account for a small (non-trivial) share of output volatility.

### Methodology and Empirical Strategy
- Model: Financial accelerator DSGE model with sticky prices.
- Shock types analyzed:
  - Macro uncertainty: mean preserving shock to the variance of aggregate total factor productivity.
  - Micro uncertainty: mean preserving shock to the dispersion of entrepreneurs' idiosyncratic productivity.
- Empirical estimation: Time series properties of macro and micro uncertainty estimated using U.S. aggregate and firm-level data, respectively.
- Investigation focus: Different mechanisms through which uncertainty shocks are propagated and amplified.

### Key Findings and Mechanisms
- Comparative impact:
  - Micro uncertainty shocks produce larger output effects than macro uncertainty shocks.
  - Both types of uncertainty shocks contribute only a small (non-trivial) share of output volatility.
- Mechanisms explored:
  - Propagation via financial frictions in the financial accelerator framework.
  - Amplification through nominal price stickiness and related transmission channels.

### Subjects and Keywords (as listed)
- Subjects: Consumption, Credit, Labor, Money, National accounts, Prices, Production, Self-employment, Sticky prices, Total factor productivity
- Keywords: business cycle, Business cycles, Consumption, Credit, Credit frictions, depreciation rate, flex price economy, inflation rate, nomi-nal price rigidity, nominal interest rate, price stickiness, Self-employment, standard deviation, Sticky prices, Taylor series, TFP innovation, TFP process, TFP shock, Total factor productivity, transmission mechanism, uncertainty, uncertainty shock, Uncertainty shocks, WP

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_Source: https://www.imf.org/en/publications/wp/issues/2017/09/29/uncertainty-financial-frictions-and-nominal-rigidities-a-quantitative-investigation-45246_