Uncertainty, Financial Frictions and Nominal Rigidities : A Quantitative Investigation

Are uncertainty shocks a major source of business cycle fluctuations? This paper studies theeffect of a mean preserving shock to the variance of aggregate total factor productivity(macro uncertainty) and to the dispersion of entrepreneurs' idiosyncratic productivity (microuncertainty) in a financial accelerator DSGE model with sticky prices. It explores thedifferent mechanisms through which uncertainty shocks are propagated and amplified. Thetime series properties of macro and micro uncertainty are estimated using U.S. aggregate andfirm-level data, respectively. While surprise increases in micro uncertainty have a largerimpact on output than macro uncertainty, these account for a small (non-trivial) share ofoutput volatility