Measuring Uncertainty and Its Impact on the Economy

Andrea Carriero, Todd Clark and Massimiliano Marcellino

No 1639, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: We propose a new framework for measuring uncertainty and its effects on the economy, based on a large VAR model with errors whose stochastic volatility is driven by two common unobservable factors, representing aggregate macroeconomic and financial uncertainty. The uncertainty measures can also influence the levels of the variables so that, contrary to most existing measures, ours reflect changes in both the conditional mean and volatility of the variables, and their impact on the economy can be assessed within the same framework. Moreover, identification of the uncertainty shocks is simplified with respect to standard VAR-based analysis, in line with the FAVAR approach and with heteroskedasticity-based identification. Finally, the model, which is also applicable in other contexts, is estimated with a new Bayesian algorithm, which is computationally efficient and allows for jointly modeling many variables, while previous VAR models with stochastic volatility could only handle a handful of variables. Empirically, we apply the method to estimate uncertainty and its effects using US data, finding that there is indeed substantial commonality in uncertainty, sizable effects of uncertainty on key macroeconomic and financial variables with responses in line with economic theory.

Keywords: Bayesian VARs; stochastic volatility; large datasets (search for similar items in EconPapers)
JEL-codes: C11 C13 C33 C55 E44 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2016
New Economics Papers: this item is included in nep-mac, nep-ore and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

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Related works:
Journal Article: Measuring Uncertainty and Its Impact on the Economy (2018)
Working Paper: Measuring Uncertainty and Its Impact on the Economy (2016)
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