Itay Saporta-Eksten

Really Uncertain Business Cycles

We investigate the role of uncertainty in business cycles. First, we demonstrate that microeconomic uncertainty rises sharply during recessions, including during the Great Recession of 2007–2009. Second, we show that uncertainty shocks can generate drops in gross domestic product of around 2.5% in a dynamic stochastic general equilibrium model with heterogeneous firms. However, we also find that uncertainty shocks need to be supplemented by first†moment shocks to fit consumption over the cycle. So our data and simulations suggest recessions are best modelled as being driven by shocks with a negative first moment and a positive second moment. Finally, we show that increased uncertainty can make first†moment policies, like wage subsidies, temporarily less effective because firms become more cautious in responding to price changes.

Children, Time Allocation, and Consumption Insurance

We study choices of households deciding on consumption and allocation of spouses’ time to work, leisure, and child care. With uncertainty, the allocation of goods and time over the life cycle also serves the purpose of smoothing marginal utility in response to shocks. Combining data on consumption, wages, hours of work, and time spent with children, we compute the sensitivity of consumption and time allocation to transitory and permanent wage shocks. We find that family labor supply responses depend on three counteracting forces: complementarity of leisure time, substitutability of time in the production of child services, and added worker effects.