Complementarity and Macroeconomic Uncertainty

Abstract

Macroeconomic uncertainty-the conditional volatility of the unforecastable component of a future value of a time series-shows considerable variation in the data. A typical assumption in business cycle models is that production is Cobb-Douglas. Under that assumption, this paper shows there is usually little, if any, endogenous variation in output uncertainty, and first moment shocks have similar effects in all states of the economy. When the model departs from Cobb-Douglas production and assumes capital and labor are gross complements, first-moment shocks have state-dependent effects and can cause meaningful variation in uncertainty compared to the data. Estimating several variants of a nonlinear real business cycle model reveals the data strongly prefers a model with high complementarity between capital and labor inputs.

On the asymmetries created by the Great Recession in the US real estate market

“…The resulting financial and economic crisis created an enormous loss in terms of output and financial wealth. It was also associated with a rise in government spending, a decrease in skills due to long-lasting unemployment and other psychological traumas (Atkinson et al, 2013). Taking into consideration the trend growth of the precrisis period and the eventuality of an oil-induced recession in the absence of the crisis, Atkinson et al (2013) estimates that the Great Recession has cost between 40 and 90% of 2007 economic output, an amount ranging from $6 to $14tn.…”