Countercyclical Fluctuations in Uncertainty are Endogenous

35 Pages Posted: 19 Jul 2021

See all articles by Joshua Bernstein

Joshua Bernstein

Indiana University Bloomington - Department of Economics

Michael Plante

Federal Reserve Bank of Dallas; Indiana University Bloomington - Center for Applied Economics and Policy Research

Alexander W. Richter

Federal Reserve Bank of Dallas

Nathaniel A. Throckmorton

William & Mary

Date Written: July, 2021

Abstract

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

Suggested Citation

Bernstein, Joshua and Plante, Michael D. and Richter, Alexander W. and Throckmorton, Nathaniel A., Countercyclical Fluctuations in Uncertainty are Endogenous (July, 2021). FRB of Dallas Working Paper No. 2109, Available at SSRN: https://ssrn.com/abstract=3888550 or http://dx.doi.org/10.24149/wp2109

Joshua Bernstein (Contact Author)

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

Michael D. Plante

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
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Indiana University Bloomington - Center for Applied Economics and Policy Research ( email )

100 South Woodlawn Avenue, Wylie Hall 250
Bloomington, IN 47405-1704
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Alexander W. Richter

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5360 (Phone)

HOME PAGE: http://alexrichterecon.com

Nathaniel A. Throckmorton

William & Mary ( email )

Economics Department
P.O. Box 8795
Williamsburg, VA 23187
United States

HOME PAGE: http://nathrockmorton.people.wm.edu/

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