Uncertainty Traps
We develop a theory of endogenous uncertainty and business cycles in which short-lived shocks can generate long-lasting recessions. In the model, higher uncertainty about fundamentals discourages investment. Since agents learn from the actions of others, information flows slowly in times of low activity and uncertainty remains high, further discouraging investment. The economy displays uncertainty traps: self-reinforcing episodes of high uncertainty and low activity. While the economy recovers quickly after small shocks, large temporary shocks may have long-lasting effects on the level of activity. The economy is subject to an information externality but uncertainty traps may remain in the efficient allocation. Embedding the mechanism in a standard business cycle framework, we find that endogenous uncertainty increases the persistence of large recessions and improves the performance of the model in accounting for the Great Recession
Year of publication: |
2014
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Authors: | Fajgelbaum, Pablo D. |
Other Persons: | Schaal, Edouard (contributor) ; Taschereau-Dumouchel, Mathieu (contributor) |
Publisher: |
[2014]: [S.l.] : SSRN |
Subject: | Schock | Shock | Risiko | Risk | Konjunkturtheorie | Business cycle theory | Investitionsentscheidung unter Unsicherheit | Investment under uncertainty |
Saved in:
freely available
Extent: | 1 Online-Ressource (92 p) |
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Series: | NBER Working Paper ; No. w19973 |
Type of publication: | Book / Working Paper |
Language: | English |
Notes: | Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments March 2014 erstellt |
Source: | ECONIS - Online Catalogue of the ZBW |
Persistent link: https://www.econbiz.de/10013056864