Working Paper

The Nonlinear Effects of Uncertainty Shocks

Abstract: We consider the effects of uncertainty shocks in a nonlinear VAR that allows uncertainty to have amplification effects. When uncertainty is relatively low, fluctuations in uncertainty have small, linear effects. In periods of high uncertainty, the effect of a further increase in uncertainty is magnified. We find that uncertainty shocks in this environment have a more pronounced effect on real economic variables. We also conduct counterfactual experiments to determine the channels through which uncertainty acts. Uncertainty propagates through both the household consumption channel and through businesses delaying investment, providing substantial contributions to the decline in GDP observed after uncertainty shocks. Finally, we find evidence of the ability of systematic monetary policy to mitigate the adverse effects of uncertainty shocks.

Keywords: uncertainty; time-varying threshold VAR; monetary policy; generalized impulse response functions;

JEL Classification: C34; E2; E32;

https://doi.org/10.20955/wp.2018.035

Status: Published in Studies in Nonlinear Dynamics and Econometrics

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2018-11-16

Number: 2018-035

Related Works

• Publisher Article: The Nonlinear Effects of Uncertainty Shocks