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Endogenous Financial Uncertainty and Macroeconomic Volatility: Evidence from the United States

Haithem Awijen, Younes Ben Zaied, Duc Khuong Nguyen and Ahmet Sensoy

MPRA Paper from University Library of Munich, Germany

Abstract: We propose an extended SVAR model to investigate the responses of the macroeconomic volatility to financial uncertainty shocks. The empirical model features the time-varying stochastic volatility-in-mean process where parameters allow for (i) the bilateral simultaneity between the shocks hitting the level and volatility of the endogenous variables, and (ii) the feedback from the endogenous variables to the volatility. Using the U.S. data, our findings show that macroeconomic volatility arises as an endogenous response to a rise in financial uncertainty. Moreover, shutting down the volatility feedback leads financial uncertainty shocks to react more strongly to macroeconomic variables. Consequently, the effects of financial uncertainty on macroeconomic volatility become more severe, especially in the short horizon.

Keywords: Stochastic volatility; Bayesian SVAR; financial uncertainty; macroeconomic volatility. (search for similar items in EconPapers)
JEL-codes: C51 D80 E44 E60 G10 (search for similar items in EconPapers)
Date: 2020-03, Revised 2020-06
New Economics Papers: this item is included in nep-mac and nep-ore
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