Structural Breaks in an Endogenous Growth Model

Abstract We study the effects of parameter uncertainty prompted by structural breaks. In our model, agents respond differently to uncertainty prompted by regime shifts in shock processes than they react to comparable perceived increases in shock volatility. The magnitude of the response to an increa...

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Bibliographic Details
Published in:The Review of economic studies 2022-03, Vol.89 (2), p.666-694
Main Authors: Cogley, Timothy, Jovanovic, Boyan
Format: Article
Language:English
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Summary:Abstract We study the effects of parameter uncertainty prompted by structural breaks. In our model, agents respond differently to uncertainty prompted by regime shifts in shock processes than they react to comparable perceived increases in shock volatility. The magnitude of the response to an increase in uncertainty about TFP associated with a structural break is greater than that of a response to a comparable perceived rise in volatility. This is because lifetime utility varies more when shocks shift beliefs and perceived wealth.
ISSN:0034-6527
1467-937X
DOI:10.1093/restud/rdab045