News and Uncertainty Shocks

Abstract

We provide novel evidence that technological news and uncertainty shocks, identified one at a time using VAR models as in the literature, are correlated; that is, they are not truly structural. We then proceed by proposing an identification scheme to disentangle the effects of news and financial uncertainty shocks. We find that by removing uncertainty effects from news shocks, the positive responses of economic activity to news shocks are strengthened in the short term; and that the negative responses of activity to financial uncertainty shocks are deepened in the medium term as ‘good uncertainty' effects on technology are purged.

Keywords: Forecasting error variance, Structural VAR, News shocks, Uncertainty shocks

JEL Classification: E32, E44