Firm Uncertainty Cycles and the Propagation of Nominal Shocks
- (pp. 276-337)
Abstract
We develop a framework to study the impact of idiosyncratic uncertainty on aggregate economic outcomes. Agents learn about individual characteristics, which receive infrequent, large, and persistent shocks. In this environment, idiosyncratic uncertainty moves in cycles, fluctuating between periods of high and low uncertainty; with additional fixed adjustment costs, the frequency and size of agents' actions also fluctuate in cycles. We apply our framework to study pricing behavior and the propagation of nominal shocks. We show, analytically and quantitatively, that idiosyncratic uncertainty cycles amplify the real effects of nominal shocks by generating cross-sectional dispersion in firms' adjustment frequency and in learning speed.Citation
Baley, Isaac, and Andrés Blanco. 2019. "Firm Uncertainty Cycles and the Propagation of Nominal Shocks." American Economic Journal: Macroeconomics, 11 (1): 276-337. DOI: 10.1257/mac.20170402Additional Materials
JEL Classification
- D21 Firm Behavior: Theory
- D81 Criteria for Decision-Making under Risk and Uncertainty
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- E31 Price Level; Inflation; Deflation
- E32 Business Fluctuations; Cycles
- E52 Monetary Policy
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