Countercyclical Fluctuations in Uncertainty are Endogenous
35 Pages Posted: 19 Jul 2021
Date Written: July, 2021
This paper uses a battery of calibrated and estimated structural models to determine the causal drivers of the negative correlation between output and aggregate uncertainty. We find the transmission of uncertainty shocks to output is weak, while aggregate uncertainty endogenously responds to first moment shocks in the presence of labor market search frictions. This indicates that countercyclical movements in aggregate uncertainty are endogenous responses to changes in output, rather than exogenous impulses. A vector autoregression on simulated data shows recursive identification techniques do not robustly identify structural uncertainty shocks.
Keywords: Uncertainty Shocks, Endogenous Uncertainty, Variance Decomposition, Nonlinear
JEL Classification: C13, D81, E32, E37, J64
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