Measuring the Response of Macroeconomic Uncertainty to Shocks

Kalvinder Shields, Nilss Olekalns (), Ólan Henry and Chris Brooks

The Review of Economics and Statistics, 2005, vol. 87, issue 2, 362-370

Abstract: Recent research documents the importance of uncertainty in determining macroeconomic outcomes, but little is known about the transmission of uncertainty across such outcomes. This paper examines the response of uncertainty about inflation and output growth to shocks documenting statistically significant size and sign bias and spillover effects. Uncertainty about inflation is a determinant of output uncertainty, whereas higher growth volatility tends to raise inflation volatility. Both inflation and growth volatility respond asymmetrically to positive and negative shocks. Negative growth and inflation shocks lead to higher and more persistent uncertainty than shocks of equal magnitude but opposite sign. © 2005 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Date: 2005
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