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Are uncertainty shocks aggregate demand shocks?

Research output: Contribution to journalJournal articlepeer-review

Published
<mark>Journal publication date</mark>30/06/2018
<mark>Journal</mark>Economics Letters
Volume167
Number of pages5
Pages (from-to)142-146
Publication StatusPublished
Early online date31/03/18
<mark>Original language</mark>English

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.