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Working Paper

Uncertainty shocks, banking frictions, and economic activity

Authors

  • Bonciani
  • D.
  • van Roye
  • B.

Publication Date

JEL Classification

E32 E52

Key Words

financial frictions

monetary policy

Perturbation Methods

stochastic volatility

Third-order approximation

Uncertainty Shocks

In this paper we investigate the effects of uncertainty shocks on economic activity using a Dynamic Stochastic General Equilibrium (DSGE) model with heterogenous agents and a stylized banking sector. We show that frictions in credit supply amplify the effects of uncertainty shocks on economic activity. This amplification channel stems mainly from the stickiness in banking retail interest rates. This stickiness reduces the effectiveness in the transmission mechanism of monetary policy.

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Research Center

  • Macroeconomics

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