Uncertainty shocks and business cycles in Brazil : a DSGE approach

Abstract

In this present work I analyze the impact of uncertainty shocks on the Brazilian economy. I employ a Dynamic Stochastic General Equilibrium model to assess the transmission channels of uncertainty shocks. could be identified and I solve the model using a third order approximation for the policy functions since lower order approximations are not able to capture the effects of volatility shocks. Examining the channels through which shocks of uncertainty on TFP and interest rates may affect Brazilian economy, the impulse-response functions suggest that an increase in domestic and external volatility usually leads to a drop in consumption, investment, and output, and an increase in labor supply and external debt. Through the variance decomposition uncertainty shocks are relevant to explain the dynamics of economic activity in Brazil. Additionally I perform a robustness analysis and showed that the results are maintained in response to different calibrations.