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Are the Effects of Uncertainty Shocks Big or Small?

Author

Listed:
  • Piergiorgio Alessandri

    (Bank of Italy)

  • Andrea Gazzani

    (Bank of Italy)

  • Alejandro Vicondoa

    (Pontificia Universidad Católica de Chile)

Abstract
Previous works have reached widely divergent conclusions on the macroeconomic relevance of uncertainty shocks. We show that this disagreement reflects identification problems linked to the use of financial data in low-frequency VAR models. To bypass this difficulty, we identify uncertainty shocks using daily data and use their monthly averages as instruments in VARs. This novel identification approach captures within-month interactions between uncertainty and asset prices, providing a full picture of the pivotal role of financial markets in propagating uncertainty to the real economy. Once these interactions are accounted for, thedisagreement disappears: uncertainty shocks have a small but significant impact on economic activity across specifications and identification schemes.

Suggested Citation

  • Piergiorgio Alessandri & Andrea Gazzani & Alejandro Vicondoa, 2023. "Are the Effects of Uncertainty Shocks Big or Small?," Working Papers 244, Red Nacional de Investigadores en Economía (RedNIE).
    • Handle: RePEc:aoz:wpaper:244
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    File URL: https://rednie.eco.unc.edu.ar/files/DT/244.pdf
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    3. Jaromir Baxa & Tomas Sestorad, 2024. "Economic Policy Uncertainty in Europe: Spillovers and Common Shocks," Working Papers 2024/9, Czech National Bank.
    4. Ioannou, Demosthenes & Pagliari, Maria Sole & Stracca, Livio, 2024. "The international impact of a fragile EMU," European Economic Review, Elsevier, vol. 161(C).

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    More about this item

    Keywords

    uncertainty shocks; financial shocks; structural vector autoregression; high-frequency identification; external instruments;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation

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