Identifying Uncertainty Shocks Using the Price of Gold

48 Pages Posted: 24 Feb 2016

Multiple version iconThere are 3 versions of this paper

Date Written: February 2016

Abstract

We propose a new instrument to identify the impact of uncertainty shocks in a SVAR model with external instruments. We construct the instrument for uncertainty shocks by exploiting variations in the price of gold around selected events. The events capture periods of changes in uncertainty unrelated to other macroeconomic shocks. The variations in the price of gold around such events provide a measure correlated with the underlying uncertainty shocks, due to the perception of gold as a safe haven asset. The proposed approach improves upon the recursive identification of uncertainty shocks by not restricting only one structural shock to potentially affect all variables in the system. Replicating Bloom (2009), we find that the recursive approach underestimates the effects of uncertainty shocks and their role in driving monetary policy.

Keywords: Economic uncertainty, external proxy SVAR, safe haven assets

JEL Classification: E32, C32, D81

Suggested Citation

Piffer, Michele and Podstawski, Maximilian, Identifying Uncertainty Shocks Using the Price of Gold (February 2016). DIW Berlin Discussion Paper No. 1549, Available at SSRN: https://ssrn.com/abstract=2737262 or http://dx.doi.org/10.2139/ssrn.2737262

Michele Piffer

King’s College London ( email )

Strand
London, England WC2R 2LS
United Kingdom

Maximilian Podstawski (Contact Author)

DIW Berlin ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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