Are uncertainty shocks aggregate demand shocks?

Fasani, S. and Rossi, L. (2018) Are uncertainty shocks aggregate demand shocks? Economics Letters, 167. pp. 142-146. ISSN 0165-1765

Abstract

This note considers the Leduc and Liu (JME, 2016) model and studies the effects of their uncertainty shock under different Taylor-type rules. It shows that both the responses of real and nominal variables highly depend on the Taylor rule considered. Remarkably, inflation reacts positively so that uncertainty shocks look more like negative supply shocks, once an empirically plausible degree of interest rate smoothing is taken into account. This result is reinforced with less reactive monetary rules. Overall, these rules alleviate the recession.