Abstract: This paper investigates the macroeconomic effects of uncertainty originating in the financial sector. To this end, I first document empirical relevance of financial uncertainty using SVAR methods. Then, I employ the DSGE framework developed by Gertler and Karadi (2011) to uncover the underlying transmission mechanism. The model generates macroeconomic dynamics that are consistent with the SVAR evidence. In particular, an increase in financial uncertainty raises the risk premium and leads to a decline in output, consumption, investment and hours worked. This outcome arises mainly because of an endogenous tightening of the financial constraint, which in turn triggers the financial accelerator mechanism. Finally, internal habit formation and nominal rigidities act as additional amplification mechanisms for financial uncertainty shocks.
JEL Codes: E44, E32, E21
[current version available upon request]
Abstract: This paper investigates the implications of global uncertainty shocks for cross-country banking portfolios and the macroeconomic aggregates. To this end, I use a two-country DSGE framework with incomplete markets, financial frictions and endogenous portfolio choice. The countries are assumed to be ex-ante asymmetric which allows me to consider both developed and emerging market economies. The analysis suggests that the Great retrenchment in capital flows during the financial crisis was triggered by an increase in global financial uncertainty. In particular, an increase in the financial uncertainty weakens the negative relationship between the stochastic discount factor of home financial intermediaries and the rate of return on domestic assets making them a better hedge against home shocks. Simultaneously, an adverse realization of financial uncertainty tightens the endogenous leverage constraint in both countries and leads ultimately to a worldwide recession.
JEL Codes: F34, F41, F44, G11
[current version available upon request]
Abstract: This paper combines the bifurcation theory and the nonlinear moving average approximation to solve asymmetric DSGE models with portfolio choice. The proposed method can be viewed as a generalization of the workhorse routine developed by Devereux and Sutherland (2010, 2011). Contrary to their approach, it can be used to obtain higher-order approximation of gross asset holdings capturing the direct effect of the presence of risk on agents’ portfolios. The risk-adjusted net and gross asset positions are shown to be in line with the global solution. Hence, the proposed method is able to account for asymmetries, which may lead to an accuracy improvement in terms of Euler equation errors relative to the Devereux-Sutherland procedure.
JEL Codes: E44, F41, G11