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NBER Working Papers and Publications
|July 2016||The Common Origin of Uncertainty Shocks|
with Nicholas Kozeniauskas, Laura Veldkamp: w22384
Various types of uncertainty shocks can explain many phenomena in macroeconomics and finance. But does this just amount to inventing new, exogenous, unobserved shocks to explain challenging features of business cycles? This paper argues that three conceptually distinct fluctuations, all called uncertainty shocks, have a common origin. Specifically, we propose a mechanism that generates micro uncertainty (uncertainty about firm-level shocks), macro uncertainty (uncertainty about aggregate shocks) and higher-order uncertainty (disagreement) shocks from a common origin and causes them to covary, just as they do in the data. When agents use standard maximum likelihood techniques and real-time data to re-estimate parameters that govern the probability of disasters, the result is that micro, ma...
|August 2014||Understanding Uncertainty Shocks and the Role of Black Swans|
with Laura Veldkamp: w20445
A fruitful emerging literature reveals that shocks to uncertainty can explain asset returns, business cycles and financial crises. The literature equates uncertainty shocks with changes in the variance of an innovation whose distribution is common knowledge. But how do such shocks arise? This paper argues that people do not know the true distribution of macroeconomic outcomes. Like Bayesian econometricians, they estimate a distribution. Using real-time GDP data, we measure uncertainty as the conditional standard deviation of GDP growth, which captures uncertainty about the distributions estimated parameters. When the forecasting model admits only normally-distributed outcomes, we find small, acyclical changes in uncertainty. But when agents can also estimate parameters that regulate skewn...