[KAEA-VSS] Empirical Macro-Finance and Macroeconometrics Group (8pm EST, September 9, 2021)

Presenter: Hwagyun Hagen Kim (Texas A&M University)

Discussant: Hyunduk Suh (Inha University)

Time-Varying Expectation Effects of Switching Financial Uncertainty

Abstract

This paper investigates the effects of regime switches in capital market conditions in a general equilibrium model, with costly-state-verification and a process of switching steady-state level of uncertainty (SS-uncertainty). Decision makers expect future SS-uncertainty regimes using the past fundamental shocks, but an expectation shock exists. We estimate the model to uncover evidence of state dependent uncertainty effects. Shock responses significantly vary, depending on the current uncertainty regime and shock magnitude. A pessimistic expectation shock tends to produce inertia, whereas an optimistic shock increases economic activities. Furthermore, in the high (low) SS-uncertainty regime, economic activities decrease (increase) regardless of the shocks’ direction. This anomaly disappears for sufficiently large expectation shocks.