Separating Uncertainties

Abstract

Multiple studies have discovered a role for uncertainty in describing output and employment. None have separated uncertainty into policy uncertainty and non-policy uncertainty and examined them together. I find that policy uncertainty is not a good predictor of broad uncertainty events and that it does not affect output and employment when controlling for non-policy uncertainty. Using VARs and the major monthly broad uncertainty measures introduced in the past decade, I find wide variation in the behavior of the series. Non-policy uncertainty has large effects on output regardless of the underlying uncertainty indicator and Cholesky order. I conclude that, “correct” policy is more important than decisive policy.

Keywords: Uncertainty, EPU, manufacturing, employment, industrial production, policy

JEL Classification: e, h1, j2, p11,