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This paper studies the macroeconomic effects of uncertainty shocks with an emphasis on the interaction between elevated uncertainty and credit market conditions when the economy is in different regimes (recessions vs. non-recessions). We use a smooth-transition factor-augmented vector autoregression (ST-FAVAR) and a large monthly panel of U.S. macroeconomic and financial indicators in our estimation. Our findings are twofold: (1) While an unanticipated increase in uncertainty has adverse effects on the real economy and financial markets, the effects are quantitatively larger during recessions; (2) The financial channel is important in the transmission of uncertainty shocks, with a greater role during recessions and in the short run.
We study the role of uncertainty shocks in explaining unemployment dynamics, separating out the role of aggregate and sectoral channels. Using S&P500 data from the first quarter of 1957 to third quarter of 2014, we construct separate indices to measure aggregate and sectoral uncertainty and compare their effects on the unemployment rate in a standard macroeconomic vector autoregressive (VAR) model. We find that aggregate uncertainty leads to an immediate increase in unemployment, with the impact dissipating within a year. In contrast, sectoral uncertainty has a long-lived impact on unemployment, with the peak impact occurring after two years. The results are consistent with a view that the impact of aggregate uncertainty occurs through a “wait-and-see” mechanism while increased sectoral uncertainty raises unemployment by requiring greater reallocation across sectors.
This paper quantifies the economic impact of uncertainty shocks in the UK using data that span the recent Great Recession. We find that uncertainty shocks have a significant impact on economic activity in the UK, depressing industrial production and GDP. The peak impact is felt fairly quickly at around 6-12 months after the shock, and becomes statistically negligible after 18 months. Interestingly, the impact of uncertainty shocks on industrial production in the UK is strikingly similar to that of the US both in terms of the shape and magnitude of the response. However, unemployment in the UK is less affected by uncertainty shocks. Finally, we find that uncertainty shocks can account for about a quarter of the decline in industrial production during the Great Recession.
Author : Eric M. Leeper Publisher : International Monetary Fund Page : 65 pages File Size : 38,74 MB Release : 2012-06-01 Category : Business & Economics ISBN : 1475558244
News - or foresight - about future economic fundamentals can create rational expectations equilibria with non-fundamental representations that pose substantial challenges to econometric efforts to recover the structural shocks to which economic agents react. Using tax policies as a leading example of foresight, simple theory makes transparent the economic behavior and information structures that generate non-fundamental equilibria. Econometric analyses that fail to model foresight will obtain biased estimates of output multipliers for taxes; biases are quantitatively important when two canonical theoretical models are taken as data generating processes. Both the nature of equilibria and the inferences about the effects of anticipated tax changes hinge critically on hypothesized information flows. Different methods for extracting or hypothesizing the information flows are discussed and shown to be alternative techniques for resolving a non-uniqueness problem endemic to moving average representations.
In this thesis, I study from various angles how uncertainty affects macroeconomic activity. Chapter 1 investigates the effects of uncertainty shocks on economic activity in the euro area by means of a Dynamic Stochastic General Equilibrium (DSGE) model with heterogenous agents and a stylized banking sector. We show that frictions in credit supply amplify the effects of uncertainty shocks on economic activity. This amplification channel stems mainly from the stickiness in bank loan rates. This stickiness reduces the effectiveness in the transmission mechanism of monetary policy. In chapter 2, I provide empirical evidence that uncertainty shocks have strong asymmetric effects on economic activity depending on the phase of the business cycle. In particular, the impulse responses estimated with the local projection method on a smooth-transition model show that in recessions uncertainty shocks strongly dampen economic activity. In an expansion, the effects are reversed, and uncertainty shocks have positive macroeconomic effects. One possible explanation is that during expansions uncertainty fosters investments and economic activity through the "growth options" channel, while in recessions it reduces investments via the "wait-and-see" channel. In chapter 3, I show that shocks to macroeconomic uncertainty negatively affect economic activity both in the short- and in the long-run. In a New Keynesian model with endogenous-growth through investment in R&D, volatility shocks have negative effects in the short-term because of precautionary savings, lower propensity to undertake risky investments and rising markups, and in the long-run because of the fall in R&D investment. The presence of long-run fluctuations in consumption makes agents more risk-averse, which strongly amplifies the effects of uncertainty shocks.
A traditional argument in favor of flexible exchange rates is that they insulate output better from real shocks, because the exchange rate can adjust and stabilize demand for domestic goods through expenditure switching. This argument is weakened in models with high foreign currency debt and low exchange rate pass-through to import prices. The present study evaluates the empirical relevance of these two factors. We analyze the transmission of real external shocks to the domestic economy under fixed and flexible exchange rate regimes for a broad sample of countries in a Panel VAR and let the responses vary with foreign currency indebtedness and import structure. We find that flexible exchange rates do not insulate output better from external shocks if the country imports mainly low pass-through goods and can even amplify the output response if foreign indebtedness is high.
Bayesian econometric methods have enjoyed an increase in popularity in recent years. Econometricians, empirical economists, and policymakers are increasingly making use of Bayesian methods. This handbook is a single source for researchers and policymakers wanting to learn about Bayesian methods in specialized fields, and for graduate students seeking to make the final step from textbook learning to the research frontier. It contains contributions by leading Bayesians on the latest developments in their specific fields of expertise. The volume provides broad coverage of the application of Bayesian econometrics in the major fields of economics and related disciplines, including macroeconomics, microeconomics, finance, and marketing. It reviews the state of the art in Bayesian econometric methodology, with chapters on posterior simulation and Markov chain Monte Carlo methods, Bayesian nonparametric techniques, and the specialized tools used by Bayesian time series econometricians such as state space models and particle filtering. It also includes chapters on Bayesian principles and methodology.