Federal Reserve Bank of St. Louis
The Nonlinear Effects of Uncertainty Shocks
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.
Cite this item
Laura E. Jackson & Kevin L. Kliesen & Michael T. Owyang, The Nonlinear Effects of Uncertainty Shocks, Federal Reserve Bank of St. Louis, Working Papers 2018-35, 16 Nov 2018.
- C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
- E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
Keywords: uncertainty; time-varying threshold VAR; monetary policy; generalized impulse response functions
This item with handle RePEc:fip:fedlwp:2018-035
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