Endogenous Uncertainty

Andrea Carriero, Todd Clark and Massimiliano Marcellino

No 1805, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: We show that macroeconomic uncertainty can be considered as exogenous when assessing its effects on the U.S. economy. Instead, financial uncertainty can at least in part arise as an endogenous response to some macroeconomic developments, and overlooking this channel leads to distortions in the estimated effects of financial uncertainty shocks on the economy. We obtain these empirical findings with an econometric model that simultaneously allows for contemporaneous effects of both uncertainty shocks on economic variables and of economic shocks on uncertainty. While the traditional econometric approaches do not allow us to simultaneously identify both of these transmission channels, we achieve identification by exploiting the heteroskedasticity of macroeconomic data. Methodologically, we develop a structural VAR with time-varying volatility in which one of the variables (the uncertainty measure) impacts both the mean and the variance of the other variables. We provide conditional posterior distributions for this model, which is a substantial extension of the popular leverage model of Jacquier, Polson, and Rossi (2004), and provide an MCMC algorithm for estimation.

Keywords: Uncertainty; Endogeneity; Identification; Stochastic Volatility; Bayesian Methods (search for similar items in EconPapers)
JEL-codes: C11 C32 D81 E32 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2018-03-29
New Economics Papers: this item is included in nep-ecm, nep-mac and nep-ore
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://doi.org/10.26509/frbc-wp-201805 Full text (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwp:1805

Ordering information: This working paper can be ordered from

DOI: 10.26509/frbc-wp-201805

Access Statistics for this paper

More papers in Working Papers (Old Series) from Federal Reserve Bank of Cleveland Contact information at EDIRC.
Bibliographic data for series maintained by 4D Library ().