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? To address these questions we pursue a novel identification strategy that restricts the behavior of the structural shocks. We find that sharply higher uncertainty about real economic activity in recessions is often an endogenous response to other shocks, while uncertainty about financial markets is a likely source of the fluctuations. These findings point to the need for a better understanding of how uncertainties in financial markets are transmitted to the macroeconomy.
Document Object Identifier (DOI): 10.3386/w21803
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