What Are Uncertainty Shocks?

41 Pages Posted: 10 Apr 2019

See all articles by Nicholas Kozeniauskas

Nicholas Kozeniauskas

Bank of Portugal - Research Department

Anna Orlik

Board of Governors of the Federal Reserve System

Laura Veldkamp

New York University - Stern School of Business; National Bureau of Economic Research (NBER)

Date Written: June 13, 2018

Abstract

Many modern business cycle models use uncertainty shocks to generate aggregate fluctuations. However, uncertainty is measured in a variety of ways. Our analysis shows that the measures are not the same, either statistically or conceptually, raising the question of whether fluctuations in them are actually generated by the same phenomenon. We propose a mechanism that generates realistic micro dispersion (cross-sectional variance of firm-level outcomes), higher-order uncertainty (disagreement) and macro uncertainty (uncertainty about macro outcomes) from changes in macro volatility. If we want to consider "uncertainty shocks" as a unified phenomenon, these results show what such a shock might actually entail.

Keywords: Uncertainty shocks, disaster risk, aggregate fluctuations, surveys of expectations, firm dispersion

JEL Classification: E32, E37

Suggested Citation

Kozeniauskas, Nicholas and Orlik, Anna and Veldkamp, Laura, What Are Uncertainty Shocks? (June 13, 2018). Journal of Monetary Economics, Vol. 100, 2018. Available at SSRN: https://ssrn.com/abstract=3358305

Nicholas Kozeniauskas (Contact Author)

Bank of Portugal - Research Department ( email )

Av. Almirante Reis 71, 6th
Lisbon 1150-012
Portugal

Anna Orlik

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Laura Veldkamp

New York University - Stern School of Business ( email )

44 West 4th St. - Suite 7-180
New York, NY 100012
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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