nat@wm.edu

Associate Professor

Economics Department,

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Computational Economics

Advisory Council General Member

Society for Computational Economics

**“Uncertainty Shocks in a Model of Effective Demand: Comment“**

with Oliver de Groot and Alex Richter

*Econometrica*, July 2018, Volume 86, Pages 1513-1526

FRB Dallas Working Paper 1706

Online Appendix

Basu and Bundick (2017) show an intertemporal preference volatility shock has meaningful effects on real activity in a New Keynesian model with Epstein and Zin (1991) preferences. We show when the distributional weights on current and future utility in the Epstein-Zin time-aggregator do not sum to 1, there is an asymptote in the responses to such a shock with unit intertemporal elasticity of substitution. In the Basu-Bundick model, the intertemporal elasticity of substitution is set near unity and the preference shock only hits current utility, so the sum of the weights differs from 1. We show when we restrict the weights to sum to 1, the asymptote disappears and preference volatility shocks no longer have large effects. We examine several different calibrations and preferences as potential resolutions with varying degrees of success.