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Uncertainty and Business Cycles: Exogenous Impulse or Endogenous Response?

Sydney Ludvigson (), Sai Ma and Serena Ng ()

No 21803, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Uncertainty about the future rises in recessions. But is uncertainty a source of business cycles or an endogenous response to them, and does the type of uncertainty matter? We propose a novel SVAR identification strategy to address these questions. Rather than imposing a priori restrictions on the structural parameters of the SVAR, we use the data to motivate inequality constraints on the structural shocks at specific dates that unusual events are known to have occurred ex post. We then use the correlation of the shocks with external variables to tighten the identified set. This leads to a set of solutions for inference. We find that sharply higher macroeconomic uncertainty in recessions is often an endogenous response to output shocks, while uncertainty about financial markets is a likely source of output fluctuations. But the findings also suggest that macroeconomic uncertainty plays an important role in recessions, by substantially amplifying downturns caused by other shocks. Together, the results suggest that second moment shocks have first order consequences, but that not all uncertainties are alike.

JEL-codes: E00 E32 E44 G01 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2015-12
Note: AP EFG ME
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