Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/245509 
Year of Publication: 
2021
Series/Report no.: 
CESifo Working Paper No. 9328
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This paper uses a nonlinear vector autoregression and a non-recursive identification strategy to show that an equal-sized uncertainty shock generates a larger contraction in real activity when growth is low (as in recessions) than when growth is high (as in expansions). An estimated New Keynesian model with recursive preferences and approximated to third order around its risky steady state replicates these state-dependent responses. The key mechanism behind this result is that firms display a stronger upward nominal pricing bias in recessions than in expansions, because recessions imply higher inflation volatility and higher marginal utility of consumption than expansions.
Subjects: 
New Keynesian model
nonlinear SVAR
non-recursive identification
state-dependent uncertainty shock
risky steady state
JEL: 
C32
E32
Document Type: 
Working Paper
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