Micro and Macro Uncertainty

Uncertainty rises sharply during economic downturns at both the micro and macro level. Leveraging a new solution method, I study the interaction between micro and macro uncertainty in a globally solved Heterogeneous Agent New Keynesian (HANK) model with aggregate risk, counter-cyclical unemployment risk, and a zero lower bound (ZLB) constraint on monetary policy. The interaction with micro uncertainty emerges as the dominant transmission channel of macro uncertainty. The overall effect of uncertainty on economic activity is substantially amplified. My model also generates endogenous spikes in uncertainty during bad times as the economy is pushed towards the ZLB. In general equilibrium, a feedback loop emerges that gives rise to an "Uncertainty Multiplier": A contraction in economic activity spurs endogenous uncertainty about the future, which depresses aggregate demand further. The model matches the skewness and kurtosis exhibited by macro uncertainty in the data even in the absence of exogenous second-moment shocks. The interplay between micro and macro uncertainty has ramifications for the nature of zero lower bound spells, the welfare cost of business cycles, and the effectiveness of stabilization policy