Uncertainty, Risk-taking, and the Business Cycle in Germany

Abstract

This article investigates the business cycle behaviour of measures of perceived uncertainty and financial risk premia in Germany over the past two decades. Both the perceived uncertainty and the financial risk premia are highly countercyclical and may therefore amplify and propagate the transmission of business cycle shocks. We find that exogenous uncertainty shocks have a significantly small but temporary effect on output and financial risk premia and their overall contribution to output developments is limited. Positive financial risk aversion shocks, on the contrary, have a protractred but large negative impact on the economy and are more important in driving business cycles than uncertainty shocks. (JEL codes: E32, E44, G01, G20)

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