Uncertainty Shocks in a Model of Effective Demand: Reply

July 13, 2018
By Susanto Basu and Brent Bundick

Research Working PaperWhen prices adjust slowly to changing economic conditions, higher uncertainty about the future can cause a recession.

de Groot, Richter, and Throckmorton (2018) argue that the model in Basu and Bundick (2017) can match the empirical evidence only because the model assumes an asymptote in the economy’s response to an uncertainty shock. In this Reply, we provide new results showing that our model’s ability to match the data does not rely either on assuming preferences that imply an asymptote nor on a particular value of the intertemporal elasticity of substitution. We demonstrate that shifting to preferences that are not vulnerable to the Comment’s critique does not change our previous conclusions about the propagation of uncertainty shocks to macroeconomic outcomes.

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RWP 18-05, July 2018

JEL Classification: E32, E52

Article Citation

  • Basu, Susanto, and Brent Bundick. 2018. “Uncertainty Shocks in a Model of Effective Demand: Reply.” Federal Reserve Bank of Kansas City, Research Working Paper no. 18-05. Available at https://doi.org/10.18651/RWP2018-05

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