Uncertainty Shocks, Innovation, and Productivity

Abstract

In this paper, we argue that macroeconomic uncertainty shocks cause a persistent decline in economic activity, investment in R&D, and total factor productivity. After providing empirical evidence, we build a DSGE model with sticky prices and endogenous growth through investment in R&D. In this framework, uncertainty shocks lead to a short-term fall in demand because of precautionary savings and rising markups. The reduction in the utilised aggregate stock of R&D determines a fall in productivity, which causes a long-term reduction in the main macroeconomic aggregates. When households feature Epstein–Zin preferences, they become averse to these long-term risks affecting their consumption process (long-run risk channel), which severely exacerbates the precautionary savings motive and the overall adverse effects of uncertainty shocks.

Macroeconomic Uncertainty and Capital-Skill Complementarity

“…In the following periods, uncertainty responds to all shocks through its relation with the lags of the variables included in the model. This identification strategy is in line with that in Bloom (2009), Basu and Bundick (2017b), Bonciani and Oh (2020). Figure 25 shows that the results are very similar to the baseline specification.…”

“…The estimated period ranges from to 1979M1 to 2018M12. π t ] is a vector comprising the following variables: σ z t -the macroeconomic uncertainty index from Jurado, Ludvigson, and Ng (2015), y t -Industrial Production (IP) Index, i t -real gross private domestic investment, 38 c t -personal consumption expenditures, n s t the skilled employment rate defined as the share of skilled employed workers in the skilled labor force, n s t n u t the employment rate ra-37 It is common practice to include stock prices in such empirical specifications, see other studies, for example, Bloom (2009), Basu and Bundick (2017b), Bonciani and Oh (2020) 38 Since monthly series are not available, I temporally dissagregate quarterly time series of real gross private domestic investment into monthly series with Chow-Lin method using software JDemetra+ version 2.2.1. JDemetra+ is a tool for seasonal adjustment (SA) developed by the National Bank of Belgium (NBB) in cooperation with the Deutsche Bundesbank and Eurostat in accordance with the Guidelines of the European Statistical System (ESS).…”

Uncertainty before and during COVID‐19: A survey

“…Consequently, aggregate productivity declines too, and said decline exerts a negative impact in the long‐run, that is, cyclical and potential output are both affected. Bonciani and Oh ( 2020 ) show that the way in which one models households' preferences matters. In particular, if households feature Epstein‐Zin preferences, the above‐described long‐term risk affects households' contemporaneous consumption choices, therefore exacerbating the business cycle negative effects of uncertainty shocks.…”

“…However, from a theoretical standpoint, it is unclear if firms should actually increase R&D spending in presence of uncertainty. For instance, Bonciani and Oh (2020) propose a new Keynesian model of the business cycle that features endogenous growth via R&D investment. In presence of uncertainty shocks, precautionary savings and countercyclical price markup work in favor of weakening aggregate demand (see also Fernández-Villaverde et al (2015) and Born and Pfeifer (2021)).…”