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TIME‐VARYING UNCERTAINTY AND THE CREDIT CHANNEL
Author(s) -
Dorofeenko Victor,
Lee Gabriel S.,
Salyer Kevin D.
Publication year - 2008
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/j.1467-8586.2008.00284.x
Subject(s) - ceteris paribus , economics , production (economics) , investment (military) , business cycle , microeconomics , linearization , agency (philosophy) , agency cost , econometrics , monetary economics , macroeconomics , finance , corporate governance , physics , epistemology , nonlinear system , quantum mechanics , politics , political science , law , shareholder , philosophy
We extend the Carlstrom and Fuerst ( American Economic Review , 1997, 87, pp. 893–910) agency cost model of business cycles by including time‐varying uncertainty in the technology shocks that affect capital production. We first demonstrate that standard linearization methods can be used to solve the model yet second moments enter the economy's equilibrium policy functions. We then demonstrate that an increase in uncertainty causes, ceteris paribus , a fall in investment supply. We also show that persistence of uncertainty affects both quantitatively and qualitatively the behaviour of the economy.