The nonlinear effects of uncertainty shocks

Jackson Laura E. (), Kevin Kliesen and Michael Owyang
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Jackson Laura E.: Department of Economics, Bentley University, 175 Forest Street, Waltham, MA 02452, USA
Authors registered in the RePEc Author Service: Laura Jackson Young

Studies in Nonlinear Dynamics & Econometrics, 2020, vol. 24, issue 4, 19

Abstract: We consider the effects of uncertainty shocks in a nonlinear VAR that allows uncertainty to have amplification effects. When uncertainty is relatively low, fluctuations in uncertainty have small, linear effects. In periods of high uncertainty, the effect of a further increase in uncertainty is magnified. We find that uncertainty shocks in this environment have a more pronounced effect on real economic variables. We also conduct counterfactual experiments to determine the channels through which uncertainty acts. Uncertainty propagates through both the household consumption channel and through businesses delaying investment, providing substantial contributions to the decline in GDP observed after uncertainty shocks. Finally, we find evidence of the ability of systematic monetary policy to mitigate the adverse effects of uncertainty shocks.

Keywords: generalized impulse response functions; monetary policy; time-varying threshold VAR; uncertainty (search for similar items in EconPapers)
JEL-codes: C34 E2 E32 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (11)

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Related works:
Working Paper: The Nonlinear Effects of Uncertainty Shocks (2018)
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DOI: 10.1515/snde-2019-0024

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