Uncertainty and Business Cycles: Exogenous Impulse or Endogenous Response?

Sydney C. Ludvigson, Sai Ma, Serena Ng

NBER Working Paper No. 21803
Issued in December 2015, Revised in May 2018
NBER Program(s):Asset Pricing, Economic Fluctuations and Growth, Monetary Economics

Uncertainty about the future rises in recessions. But is uncertainty a source of business cycles or an endogenous response to them, and does the type of uncertainty matter? To address these questions, we propose a novel shock-restricted identification strategy. We find that sharply higher uncertainty about macroeconomic activity in recessions is often an endogenous response to output shocks, while uncertainty about financial markets is a likely source of output fluctuations. The findings point to the need for a better understanding of how uncertainty in financial markets is transmitted to the macroeconomy.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w21803

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