The Real Effects of Financial Uncertainty Shocks: A Daily Identification Approach

Piergiorgio Alessandri, Andrea Giovanni Gazzani and Alejandro Vicondoa

No 559, Documentos de Trabajo from Instituto de Economia. Pontificia Universidad Católica de Chile.

Abstract: Isolating financial uncertainty shocks is difficult because financial markets rapidly price changes in several economic fundamentals. To bypass this difficulty, we identify uncertainty shocks using daily data and use their monthly averages as an instrument in a VAR. We show that this novel approach is theoretically appealing and has dramatic implications for leading empirical studies on financial uncertainty. Daily interactions between equity returns, bond spreads and expected volatility cause previous identification schemes to fail at the monthly frequency. Once these interactions are explicitly modeled, the impact of uncertainty shocks on output and inflation is significant and similar across specifications.

Date: 2021
New Economics Papers: this item is included in nep-cwa and nep-mac
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Citations: View citations in EconPapers (2)

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Working Paper: The real effects of financial uncertainty shocks: A daily identification approach (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ioe:doctra:559

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