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The Nonlinear Effects of Uncertainty Shocks

Laura E. Jackson, Kevin Kliesen () and Michael Owyang ()
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Laura E. Jackson: Bentley University, Department of Economics

Authors registered in the RePEc Author Service: Laura Jackson Young () and Laura Jackson

No 2018-35, Working Papers from Federal Reserve Bank of St. Louis

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: uncertainty; time-varying threshold VAR; monetary policy; generalized impulse response functions (search for similar items in EconPapers)
JEL-codes: C34 E2 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets and nep-mac
Date: 2018-11-16, Revised 2019-08-21
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DOI: doi.org/10.20955/wp.2018.035

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