Identifying Uncertainty Shocks Using the Price of Gold
40 Pages Posted: 6 Nov 2015 Last revised: 2 Feb 2017
There are 3 versions of this paper
Identifying Uncertainty Shocks Using the Price of Gold
Identifying Uncertainty Shocks Using the Price of Gold
Identifying Uncertainty Shocks Using the Price of Gold
Date Written: January 19, 2017
Abstract
We propose a new instrument to identify uncertainty shocks in a SVAR model with external instruments. The instrument is constructed by exploiting variations in the price of gold around events that capture periods of changes in uncertainty. The variations in the price of gold around the events correlate with the underlying uncertainty shocks, due to the perception of gold as a safe haven asset. To control for possible news-related effects associated with the events, we identify uncertainty and news shocks jointly, developing a set-identified proxy SVAR with restrictions on the correlations between shocks and proxies. We find that the recursive approach, extensively used in the literature, underestimates the effects of uncertainty shocks and delivers shocks that have more in common with news shocks than with uncertainty shocks.
Keywords: Economic uncertainty, external proxy SVAR, safe haven assets, news shocks, set-identification
JEL Classification: E32, C32, D81
Suggested Citation: Suggested Citation