Macroeconomic uncertainty matters: A nonlinear effect of financial volatility on real economic activity

Jouchi Nakajima

No HIAS-E-121, Discussion paper series from Hitotsubashi Institute for Advanced Study, Hitotsubashi University

Abstract: A stock market volatility index is a widely-used proxy of uncertainty in the macroeconomy, and its increase is shown to dampen real economic activity. In contrast, the macroeconomic uncertainty index proposed by Jurado et al. (2015) measures the predictability of a wide range of macroeconomic indicators and thus is a comprehensive indicator of macroeconomy-wide uncertainty. This paper empirically investigates a nonlinear link between financial volatility and real economic activity depending on the level of the macroeconomic uncertainty index. Based on the United States and Japan data, empirical analysis suggests that an increase in the financial volatility lowers industrial production and business fixed investment more persistently when the macroeconomic uncertainty is higher.

Keywords: Financial volatility; Macroeconomic uncertainty; Nonlinear effect (search for similar items in EconPapers)
JEL-codes: E32 E52 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2022-06
New Economics Papers: this item is included in nep-fdg, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:hit:hiasdp:hias-e-121

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