Uncertainty and Business Cycles: Exogenous Impulse or Endogenous Response?
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.
Document Object Identifier (DOI): 10.3386/w21803
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