*Risk Shocks*

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.


"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 :)

Frontiers? Your kidding, I hope.


For a start
Willem Buiter

Using Agent-Based Models for Analyzing Threats to Financial Stability
Richard Bookstaber, Research Principal, OFR U.S. Treasury Dept.

Keen's work with M. Grasselli reconciling his circuit theory with MMT

M. Grasselli uses the results to analyze the effects of austerity

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


Inequality, Leverage and Crises,
Michael Kumhof and Romain Rancière from the IMF

Shadow Banking
Zoltan Pozsar, Tobias Adrian, Adam Ashcraft,Hayley Boesky, Federal Reserve Bank of NY

You realize you are linking to contradictory works right?

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

Or Solow

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.

'from the frontiers of actual business cycle theory'

As compared to the reality of experiencing them, obviously.

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

Straight out of Hayek.

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

Good point.

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.

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.

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

- John Von Neumann

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

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

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