The macroeconomics of uncertainty

Defence date: 25 September 2019Examining Board: Prof. Evi Pappa, Universidad Carlos III Madrid (Supervisor); Prof. Axelle Ferrière, Paris School of Economics; Prof. Guido Ascari, University of Oxford; Prof. Johannes Pfeifer, University of CologneThis thesis comprises three essays that analyze how uncertainty affects the macroeconomy. Each essay investigates a particular feature of uncertainty propagation. The first essay studies the effects of uncertainty shocks on economic activity, focusing on inflation. I consider standard New Keynesian models with Rotemberg-type and Calvo-type price rigidities. Despite the belief that the two schemes are equivalent, I show that they generate different dynamics in response to uncertainty shocks. In the Rotemberg model, uncertainty shocks decrease output and inflation, in line with the empirical results. By contrast, in the Calvo model, uncertainty shocks decrease output but raise inflation because of firms’ precautionary pricing motive. The second essay, written with Dario Bonciani, shows that uncertainty shocks negatively affect economic activity not only in the short, but also in the long run. We build a New Keynesian model with endogenous growth and Epstein-Zin preferences. A decline in R&D by higher uncertainty determines a fall in productivity, which causes a long-term decrease in the macroeconomic aggregates. This long-term risk affects households’ consumption process, which exacerbates the overall negative effects of uncertainty shocks. The third essay, prepared with Anna Rogantini Picco, illustrates how economic agents’ heterogeneity is crucial for the propagation of uncertainty shocks. We build a heterogeneous agent New Keynesian model with search and matching frictions and Calvo pricing. Unemployment risk for imperfectly insured households amplifies their precautionary savings through increased uncertainty, thus further depressing consumption. Therefore, uncertainty shocks have considerably adverse effects and lead to a decrease in inflation.-- 1 The Propagation of Uncertainty Shocks: Rotemberg vs. Calvo -- 2 The Long-Run Effects of Uncertainty Shocks -- 3 Macro Uncertainty and Unemployment Risk -- Bibliography -- Appendix A Appendix to Chapter 1 -- Appendix B Appendix to Chapter 2Chapter 1 'The Propagation of Uncertainty Shocks: Rotemberg vs. Calvo' of the PhD thesis draws upon an earlier version published as EUI ECO WP 2019/01Chapter 2 'The Long-Run Effects of Uncertainty Shocks' of the PhD thesis draws upon an earlier version published as Bank of England Staff WP 2019/80