What Are Uncertainty Shocks?
41 Pages Posted: 10 Apr 2019
Date Written: June 13, 2018
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: Suggested Citation