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Market-Based Solutions to Vital Economic Issues


Kenan Institute 2024 Grand Challenge: Business Resilience
Market-Based Solutions to Vital Economic Issues
Oct 1, 2019

A Tale of Two Volatilities: Sectoral Uncertainty, Growth, and Asset-Prices


What is the impact of higher technological volatility on asset prices and macroeconomic aggregates? I find the answer hinges on its sectoral origin. Volatility that originates from the consumption (investment) sector drops (raises) macroeconomic growth rates and stock prices. Moreover, consumption (investment) sector’s technological volatility has a positive (negative) market price of risk. I show that a quantitative two-sector DSGE model that features monopolistic power for firms and sticky prices, as well as early resolution of uncertainty, can explain the differential impact of sectoral volatilities on real and financial variables. In all, the sectoral decomposition of volatility can overturn the typical negative relation between aggregate volatility and economic activity.

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