Andrea Carriero (),
Todd Clark and
No 1805, Working Papers (Old Series) from Federal Reserve Bank of Cleveland
We show that macroeconomic uncertainty can be considered as exogenous when assessing its effects on the U.S. economy. Instead, financial uncertainty can at least in part arise as an endogenous response to some macroeconomic developments, and overlooking this channel leads to distortions in the estimated effects of financial uncertainty shocks on the economy. We obtain these empirical findings with an econometric model that simultaneously allows for contemporaneous effects of both uncertainty shocks on economic variables and of economic shocks on uncertainty. While the traditional econometric approaches do not allow us to simultaneously identify both of these transmission channels, we achieve identification by exploiting the heteroskedasticity of macroeconomic data. Methodologically, we develop a structural VAR with time-varying volatility in which one of the variables (the uncertainty measure) impacts both the mean and the variance of the other variables. We provide conditional posterior distributions for this model, which is a substantial extension of the popular leverage model of Jacquier, Polson, and Rossi (2004), and provide an MCMC algorithm for estimation.
Keywords: Uncertainty; Endogeneity; Identification; Stochastic Volatility; Bayesian Methods (search for similar items in EconPapers)
JEL-codes: C11 C32 D81 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-mac and nep-ore
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