Uncertainty traps
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- dc.contributor.author Fajgelbaum, Pablo
- dc.contributor.author Schaal, Edouard
- dc.contributor.author Taschereau-Dumouchel, Mathieu
- dc.date.accessioned 2019-10-29T15:02:20Z
- dc.date.available 2019-10-29T15:02:20Z
- dc.date.issued 2019
- dc.description.abstract 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.ca
- dc.format.mimetype application/pdf*
- dc.identifier.uri http://hdl.handle.net/10230/42551
- dc.language eng
- dc.language.iso engca
- dc.relation.ispartofseries Working Papers CREI (Centre de Recerca en Economia Internacional)
- dc.rights.accessRights info:eu-repo/semantics/openAccessca
- dc.title Uncertainty trapsca
- dc.type info:eu-repo/semantics/workingPaperca