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Working paper

On Persistence of Uncertainty Shocks

Egiev S.
I study real effects of uncertainty shocks. Using time-varying volatility of the forecast error, I construct a two-part uncertainty metric that consists of persistent and volatile, burst- like components. These indices are used to study empirically several predictions of un- certainty models: that uncertainty shocks have real effects, that these effects realize in a downturn/overshoot pattern and that persistence of uncertainty shocks decreases this pat- tern’s frequency and increases its amplitude. Using the constructed metric in a simple VAR framework I show that real effects are there, that shock to the volatile uncertainty causes significant downturn/overshoot pattern, and that shock to the persistent component causes severe and prolonged damage.