Are the Effects of Uncertainty Shocks Big or Small?

Piergiorgio Alessandri, Andrea Giovanni Gazzani and Alejandro Vicondoa

No 569, Documentos de Trabajo from Instituto de Economia. Pontificia Universidad Católica de Chile.

Abstract: Previous works have reached widely divergent conclusions on the macroeconomic relevance of uncertainty shocks. We show that this disagreement reflects identification problems linked to the use of financial data in low-frequency VAR models. To bypass this difficulty, we identify uncertainty shocks using daily data and use their monthly averages as instruments in VARs. This novel identification approach captures within-month interactions between uncertainty and asset prices, providing a full picture of the pivotal role of financial markets in propagating uncertainty to the real economy. Once these interactions are accounted for, the disagreement disappears: uncertainty shocks have a small but significant impact on economic activity across specifications and identification schemes.

Keywords: uncertainty shocks; financial shocks; structural vector autoregression; high-frequency identification; external instruments (search for similar items in EconPapers)
JEL-codes: C32 C36 E32 (search for similar items in EconPapers)
Date: 2023
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Related works:
Journal Article: Are the effects of uncertainty shocks big or small? (2023)
Working Paper: Are the Effects of Uncertainty Shocks Big or Small? (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ioe:doctra:569

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