Uncertainty and Business Cycles: Exogenous Impulse or Endogenous Response?
Uncertainty about the future rises in recessions. But is uncertainty a source of business cycle fluctuations or an endogenous response to them, and does the type of uncertainty matter? We find that sharply higher uncertainty about real economic activity in recessions is most often an endogenous response to other shocks that cause business cycle fluctuations, while uncertainty about financial markets is a likely source of the fluctuations. To establish the dynamic effects of uncertainty shocks, we exploit information from external variables and the timing of extraordinary economic events to identify structural vector autoregressions under credible interpretations of the structural shocks.
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Document Object Identifier (DOI): 10.3386/w21803
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