Uncertainty Shocks Are Aggregate Demand Shocks

Zheng Liu and Sylvain Leduc

No 270, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: We present empirical evidence and a theoretical argument that uncertainty shocks act like a negative aggregate demand shock, which raises unemployment and lowers inflation. We measure uncertainty using survey data from the United States and the United Kingdom. We estimate the macroeconomic effects of uncertainty shocks in a vector autoregression (VAR) model, exploiting the relative timing of the surveys and macroeconomic data releases for identification. Our estimation reveals that uncertainty shocks accounted for at least one percentage point increases in unemployment in the Great Recession and recovery, but did not contribute much to the 1981-82 recession. We present a DSGE model to show that, to understand the observed macroeconomic effects of uncertainty shocks, it is essential to have both labor search frictions and nominal rigidities.

Date: 2013
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (64)

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Related works:
Journal Article: Uncertainty shocks are aggregate demand shocks (2016)
Working Paper: Uncertainty shocks are aggregate demand shocks (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:270

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