Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/249593 
Year of Publication: 
2021
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 13/2021
Publisher: 
Bank of Finland, Helsinki
Abstract: 
This paper uses a nonlinear vector autoregression and a non-recursive identiÖcation 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 Örms display a stronger upward nominal pricing bias in recessions than in expansions, because recessions imply higher ináation volatility and higher marginal utility of consumption than expansions.
Subjects: 
New Keynesian Model
Nonlinear SVAR
Non-recursive identiÖcation
State-dependent uncertainty shock
Risky steady state
Persistent Identifier of the first edition: 
ISBN: 
978-952-323-388-1
Document Type: 
Working Paper

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