Real Activity and Uncertainty Shocks: The Long and the Short of It

Mathias Krogh () and Giovanni Pellegrino ()
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Mathias Krogh: Aarhus University
Giovanni Pellegrino: University of Padova and Aarhus University

No 310, "Marco Fanno" Working Papers from Dipartimento di Scienze Economiche "Marco Fanno"

Abstract: We extend a state-of-the-art DSGE model to include short- and long-term uncertainty shocks that differ in terms of persistence. Considering the two shocks is essential for capturing the imperfect empirical relationship between short- and long-term financial uncertainty as proxied by the VIX. Leveraging the model’s implications about the VIX term structure, we suggest a theory-informed, nonrecursive identification strategy to separately identify the macroeconomic effects of the two shocks in a structural VAR. In line with the DSGE model, long-term uncertainty shocks have stronger and more persistent real effects than short-term shocks. Moreover, they explain a substantial fraction of the forecast error variance in unemployment and the policy rate at horizons greater than two years. In a supplementary analysis of uncertainty news shocks, we show that news about higher uncertainty in the future is recessionary.

Keywords: uncertainty shocks; medium-scale DSGE model; structural VAR; nonrecursive identification; VIX term structure. (search for similar items in EconPapers)
Pages: 62 pages
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:pad:wpaper:0310

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