Andreas Dibiasi: andreas.dibiasi[at]univ-amu.fr
Céline Poilly: celine.poilly[at]univ-amu.fr
This paper uses a nonlinear vector autoregression and a non-recursive identification strategy to show that an equal-sized uncertainty shock generates a larger contraction in real activity when growth is low (as in recessions) than when growth is high (as in expansions). We show that an estimated New Keynesian model with recursive preferences can replicate these state-dependent responses when approximated to third order around its risky steady state. In the model, the key mechanism behind this result is that .rms display a stronger upward nominal pricing bias in recessions than in expansions because recessions imply higher inflation volatility and higher marginal utility of consumption than expansions. We provide empirical support for this state-dependent channel and show that it can significantly reduce the effectiveness of systematic monetary policy during recessions.