We develop a framework to study the impact of idiosyncratic uncertainty on aggregate economic outcomes. Agents learn about individual characteristics, which receive infrequent, large, and persistent shocks. In this environment, idiosyncratic uncertainty moves in cycles, fluctuating between periods of high and low uncertainty; with additional fixed adjustment costs, the frequency and size of agents' actions also fluctuate in cycles. We apply our framework to study pricing behavior and the propagation of nominal shocks. We show, analytically and quantitatively, that idiosyncratic uncertainty cycles amplify the real effects of nominal shocks by generating cross-sectional dispersion in firms' adjustment frequency and in learning speed.
Baley, Isaac, and Andrés Blanco.
"Firm Uncertainty Cycles and the Propagation of Nominal Shocks."
American Economic Journal: Macroeconomics,
Firm Behavior: Theory
Criteria for Decision-Making under Risk and Uncertainty
Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
Price Level; Inflation; Deflation
Business Fluctuations; Cycles