Structural Breaks in an Endogenous Growth Model - NBER Working Paper 28026 - Research paper

Sep 18, 2026

Uploaded by Mack Lee

The paper studies how structural-break-driven parameter uncertainty affects agents’ responses within an endogenous growth framework. Agents react differently when uncertainty arises from regime shifts in shock processes than when uncertainty is generated by a similar increase in perceived shock volatility. The response to uncertainty about TFP tied to a structural break is larger than the response to comparable volatility perception. The mechanism is that lifetime utility changes more when shocks shift beliefs and perceived wealth.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages58

Reading Time2 h 26 min

AccessFree to download

Introduction

Structural breaks and parameter uncertainty

Beliefs, wealth effects, and growth

Empirical motivation from shock processes and recessions

NBER WORKING PAPER SERIES STRUCTURAL BREAKS IN AN ENDOGENOUS GROWTH MODEL Timothy Cogley Boyan Jovanovic Working Paper 28026 [http://www.nber.org/papers/w28026](http://www.nber.org/papers/w28026) NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 October 2020 We thank the NSF and the C.V. Starr Center for support, F. Bianchi, R. Lucas, S. Ludvigson, V. Midrigan, P. Rousseau, L. Veldkamp and G. Violante for comments, and Gaston Navarro, Sai Ma, and Angelo Orane for assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2020 by Timothy Cogley and Boyan Jovanovic. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Structural Breaks in an Endogenous Growth Model Timothy Cogley and Boyan Jovanovic NBER Working Paper No. 28026 October 2020 JEL No. E1 ABSTRACT We study the effects of parameter uncertainty prompted by structural breaks. In our model, agents respond differently to uncertainty prompted by regime shifts in shock processes than they react to comparable perceived increases in shock volatility. The magnitude of the response to an increase in uncertainty about TFP associated with a structural break is greater than that of a response to a comparable perceived rise in volatility. This is because lifetime utility varies more when shocks shift beliefs and perceived wealth. Timothy Cogley Department of Economics New York University 19 West Fourth Street, Sixth Floor New York, NY 10012 and NBER [tim.cogley@nyu.edu](tim.cogley@nyu.edu) Boyan Jovanovic New York University Department of Economics 19 W. 4th Street, 6th Floor New York, NY 10012 and NBER [Boyan.Jovanovic@nyu.edu](Boyan.Jovanovic@nyu.edu) 1 Introduction Are learning episodes similar to times when shock volatilities rise? We study this question in a general-equilibrium model for an economy that is subject to recurrent structural breaks, breaks that create parameter uncertainty. Our model is based on an Ak growth model with two aggregate shocks, a neutral TFP shock in the Önalgoods sector and an investment-speciÖc technology shock that a§ects production of capital goods. We deal only with aggregate shocks and abstract from idiosyncratic risk. Structural breaks are introduced as occasional shifts in the parameters governing technology shocks. A break alters medium- and long-run forecasts of the level of technology and initiates a period of higher parameter uncertainty. We examine how this uncertainty a§ects savings, investment, and growth. Under uncertainty, beliefs over the distributions of future shocks are an aggregate state that responds to current shock realizations. Shocks thus have wealth e§ects through the beliefs channel ñ a channel that is absent in models where the change in the shock distributions is known, and one that creates both a quantitative and a qualitative di§erence between the two classes of models. To motivate interest in structural breaks, Ögure 1 plots empirical counterparts of the shock processes1 along with NBER recession dates, shown as vertically shaded areas. Ten-year rolling standard deviations are depicted in the bottom row. TFP is shown in the upper left panel. As highlighted by Gordon (2016, pp. 545-548), productivity surges in the 1940s and never returns to its pre-war level. Although TFP also varies procylically, the mid-century surge is the dominant source of volatility and presumably also of uncertainty. For instance, the rolling 10-year standard deviation is about 5 times higher around the years of the rise t

FAQs

What is the paper’s central question about structural breaks?

It asks whether learning episodes are similar to times when shock volatilities rise, in a general-equilibrium model with recurrent structural breaks that create parameter uncertainty.

How do agents’ reactions differ between regime-shift uncertainty and volatility-shock uncertainty?

Agents respond differently: uncertainty from regime shifts in shock processes changes behavior in a way that is not replicated by comparable increases in perceived shock volatility.

Why is the response to TFP uncertainty after a structural break stronger?

Because lifetime utility varies more when shocks shift beliefs and perceived wealth, creating larger wealth effects through the beliefs channel.

Sep 18, 2026

Uploaded by Mack Lee