PDFDownload paper RWP 18-05, July 2018

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.

JEL Classification: E32, E52

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Brent Bundick

Sr. Research and Policy Advisor

Brent Bundick is a Senior Research and Policy Advisor in the Economic Research Department of the Federal Reserve Bank of Kansas City. He rejoined the Department in 2014 after com…