# Uncertainty shock

Hi there,

As part of my effort to understand how uncertainty shocks are implemented in DYNARE, I have written out a code for technology uncertainty shock in the paper by Leduc and Liu (2012), “Uncertainty Shocks are Aggregate Demand Shocks”, basically replicating Figure 13 in the Feb 2014 version of their working paper. I have successfully been able to exactly replicate it (See the attached mod file ‘Uncertainty.mod’).

Having done that I started focusing more on the co-movement puzzle and the Basu and Bundick (2011), “Uncertainty Shocks in a Model of Effective Demand” sticky price story in solving the co-movement puzzle. As a starter, I tried to write a code for a plain-vanilla RBC model with an uncertainty shock where one would expect to see Consumption going down and Hour Worked going up (the precautionary saving motive) which would then cause both Investment and Output to go up.

However, to my utter surprise, what I find is that consumption is going up and hours worked, investment, output are all going down…contrary to our intuition. Please be informed that I have followed exactly the same procedure as I did when replicating the Leduc and Liu paper. This is what has stumped me now and I can’t figure out what’s going wrong.

Could you please kindly have a look at my code for plain vanilla RBC model (called rbc_uncertainty.mod) and kindly inform me what exactly is going wrong in there?

rbc_uncertainty.mod (3.11 KB)
Uncertainty.mod (5.75 KB)

Have you excluded that there is a Jensen’s Inequality effect on the average level of TFP?

Hi professor,when I run the uncertainty.mod file,some problems occurs like these:
dynare Uncertainty
Using 64-bit preprocessor
Starting Dynare (version 4.6.1).
Calling Dynare with arguments: none
Starting preprocessing of the model file …
Found 19 equation(s).
Evaluating expressions…done
Computing static model derivatives (order 1).
Computing dynamic model derivatives (order 3).
Processing outputs …
done
Preprocessing completed.
Note: numbers do not add up to 100 due to i) non-zero correlation of simulated shocks in small samples and ii) nonlinearity

The number of input parameters.

Error simult_ (line 37)
Iter = size (ex_, 1);

Error Uncertainty. The driver (line 358)
Out = simult_ (ergo_mean, oo_. Dr, ex_, 3);

Dynare error (line 293)
Evalin (’ base ', [fname ‘driver’]);
Uncertainty.mod (5.7 KB)

You are using a mod-file for Dynare version 4.5 in 4.6. See https://github.com/JohannesPfeifer/DSGE_mod/blob/master/Basu_Bundick_2017/Basu_Bundick_2017.mod

Thanks professor,it is solved.

Dear Professor, I want to try to run the paper by Leduc and Liu (2012), “Uncertainty Shocks are Aggregate Demand Shocks”, but I can’t find the program files, could you tell me where I can find the program of this article, thank you!

You can ask the authors.