*Risk Shocks*

by on January 17, 2013 at 7:45 am in Economics | Permalink

Here is a new paper by Lawrence Christiano, Roberto Motto, and Massimo Rostagno, reporting from the frontiers of actual business cycle theory:

We augment a standard monetary DSGE model to include a Bernanke-Gertler-Gilchrist financial accelerator mechanism. We fit the model to US data, allowing the volatility of cross-sectional idiosyncratic uncertainty to fluctuate over time. We refer to this measure of volatility as ‘risk’. We find that fluctuations in risk are the most important shock driving the business cycle.

That is the NBER version, does anyone know of an ungated version?  (It is here.)  Here are the very useful overheads.

Euripides January 17, 2013 at 9:43 am

“fluctuations in risk are the most important shock driving the business cycle.”
Larry, really? It’s technology shocks, not risk! The Minnesota school may declare you persona non grata for espousing such views :)

Peter N January 17, 2013 at 9:45 am

Frontiers? Your kidding, I hope.

Try

For a start
Willem Buiter
http://blogs.ft.com/maverecon/2009/03/the-unfortunate-uselessness-of-most-state-of-the-art-academic-monetary-economics/

Using Agent-Based Models for Analyzing Threats to Financial Stability
Richard Bookstaber, Research Principal, OFR U.S. Treasury Dept.
http://www.treasury.gov/initiatives/ofr/research/Documents/OFR_Working_Paper_No3_ABM_Bookstaber_Final.pdf

Keen’s work with M. Grasselli reconciling his circuit theory with MMT
http://www.youtube.com/watch?v=UzxQcTOs4JA&feature=player_embedded

M. Grasselli uses the results to analyze the effects of austerity
http://www.youtube.com/watch?v=_qcXR5P3rck

Velocity of Pledged Collateral: Analysis and Implications
Manmohan Singh, from the IMF

http://www.imf.org/external/pubs/ft/wp/2011/wp11256.pdf

Inequality, Leverage and Crises,
Michael Kumhof and Romain Rancière from the IMF
http://www.imf.org/external/pubs/ft/wp/2010/wp10268.pdf

Shadow Banking
Zoltan Pozsar, Tobias Adrian, Adam Ashcraft,Hayley Boesky, Federal Reserve Bank of NY
http://www.ny.frb.org/research/staff_reports/sr458.pdf

Dan in Euroland January 17, 2013 at 11:46 am

You realize you are linking to contradictory works right?

Peter N January 18, 2013 at 2:59 am

You want perfect agreement from a bunch of economists? I’d say 3 groups

1) Buiter

2) Bookstaber, Keen, Grasselli

3) Singh, Pozsar and in a somewhat different perspective from Kumhof

To 1 you might add Leijonhufvud’s Axel in Wonderland
http://www-ceel.economia.unitn.it/staff/leijonhufvud/files/dsge.pdf

Or Solow
http://web.archive.org/web/20101205181700/http://democrats.science.house.gov/Media/file/Commdocs/hearings/2010/Oversight/20july/Solow_Testimony.pdf

eccdogg January 17, 2013 at 9:47 am

I was only able to look at the slides, but isn’t this just another way of saying “animal spirits”.

Certainly any measure of risk needs to be forward looking or perceived risk since actual risk is unknowable. So the paper is saying that recessions occur when investors (entrepreneurs) become more uncertain about investment outcomes. This seems to match my perception of many recent recessions driven by a period of overconfidence or perceived low risk followed by a retrenchment to higher levels of fear.

prior_approval January 17, 2013 at 9:49 am

‘from the frontiers of actual business cycle theory’

As compared to the reality of experiencing them, obviously.

Greg Ransom January 17, 2013 at 10:00 am

“We find that fluctuations in risk are the most important shock driving the business cycle.

Straight out of Hayek.

Jonathan M.F. Catalán January 17, 2013 at 10:56 am

A step behind Hayek, I think; at least Hayek could explain what causes fluctuations in risk.

DocMerlin January 17, 2013 at 12:23 pm

Good point.

Peter N January 17, 2013 at 12:03 pm

What they need is something like risk being a monotonically jncreasing function of the product of a random variable and some measure of the amount of entrepreneurial activity at the time of funding. Then if you had available capital divided between entrepreneurial investments and low return risk free investments and made the entrepreneurial share equal to a damped integral of some measure of previous periods shares minus some reference share, you would be getting close.

Of course you’ve reinvented Minsky, but that’s still a frontier in DSGE land.

anon72 January 17, 2013 at 1:01 pm

So, how is Christiano-Motto-Rostagno any different from Gertler- Kiyotaki or Gertler-Karadi? Or even Bernanke-Gertler-Gilchrest?

I get that it’s BGG + CEE/SW. From a first pass, I don’t see the value-added.

Joe Smith January 17, 2013 at 1:14 pm

“With four parameters I can fit an elephant, and with five I can make him wiggle his trunk.”

– John Von Neumann

dearieme January 17, 2013 at 1:57 pm

“We refer to this measure of volatility as ‘risk’”. I refer to solos on the nose flute as “risk”: each to his own.

Dave Tufte January 17, 2013 at 8:17 pm

Pshaw … overheads … you’re showing your age by using that word Tyler, and I’m showing mine by knowing it ;)

Comments on this entry are closed.

Previous post:

Next post: