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Identifying Uncertainty Shocks Using the Price of Gold

Michele Piffer and Maximilian Podstawski

No 1549, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: We propose a new instrument to identify the impact of uncertainty shocks in a SVAR model with external instruments. We construct the instrument for uncertainty shocks by exploiting variations in the price of gold around selected events. The events capture periods of changes in uncertainty unrelated to other macroeconomic shocks. The variations in the price of gold around such events provide a measure correlated with the underlying uncertainty shocks, due to the perception of gold as a safe haven asset. The proposed approach improves upon the recursive identification of uncertainty shocks by not restricting only one structural shock to potentially affect all variables in the system. Replicating Bloom (2009), we find that the recursive approach underestimates the effects of uncertainty shocks and their role in driving monetary policy.

Keywords: Economic uncertainty; external proxy SVAR; safe haven assets (search for similar items in EconPapers)
JEL-codes: E32 C32 D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2016
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