Perturbation solution and welfare costs of business cycles in DSGE models

Heiberger, Christopher; Maußner, Alfred

doi:10.1016/j.jedc.2019.103819

Cited by 6 publications

(1 citation statement)

References 33 publications

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“…However, most studies only focused on the impact of specific uncertainties and did not systematically account for the various characteristics of uncertainty risk, significantly reducing a model’s ability to portray disaster risks. Moreover, most previous studies that analyzed uncertainty often adopted a first-order perturbation method to approximate the DSGE model (Heiberger et al 2017 ; Niu et al 2018 ; Heiberger 2020 ). However, uncertainty risk exists in the third-order term of the DSGE model, which is related to the third-order disturbance approximation (Andreasen 2012 ).…”

Section: Literature Reviewmentioning

confidence: 99%

Higher-order dynamic effects of uncertainty risk under thick-tailed stochastic volatility

Gong

Xiong

et al. 2022

Financ Innov

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Sudden and uncertain events often cause cross-contagion of risk among various sectors of the macroeconomy. This paper introduces the stochastic volatility shock that follows a thick-tailed Student’s t-distribution into a high-order approximate dynamic stochastic general equilibrium (DSGE) model with Epstein–Zin preference to better analyze the dynamic effect of uncertainty risk on macroeconomics. Then, the high-dimensional DSGE model (DSGE-SV-t) is developed to examine the impact of uncertainty risk on the transmission mechanism among macroeconomic sectors. The empirical research found that uncertainty risk generates heterogeneous impacts on macroeconomic dynamics under different inflation levels and economic states. Among them, a technological shock has the strongest impact on employment and consumption channels. The crowding-out effect of a fiscal policy stimulus on consumption and private investments is relatively weakened when considering uncertainty risk but is more pronounced during periods of high inflation. Uncertainty risk can partly explain the decline in investments and the increase in interest rates and employment rates, given the impact of an agent’s risk preferences. Compared with external economic conditions, the inflation factor has a stronger impact on the macro transmission mechanism caused by uncertainty risk.

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