Abstract
Uncertain times are characterized by information chaos. When uncertainty is persistent, economies can display heterogeneous speeds of error correction, depending on how they have adapted to uncertainty at the outset. This paper proposes a theory and builds an empirical framework to argue that persistent uncertainty can change the equilibrium behaviour of financial and macroeconomic aggregates. Using a monthly sample of five decades for the United States, we demonstrate that co-movement patterns are heterogeneous over the distribution of real economic performance. Further, we find that uncertainty has a strong negative relationship with the majority of real economic variables with values below the median (i.e. under bad economic conditions) than it is for higher conditional quantiles (i.e. under good economic conditions). From a policy point of view, such heterogeneity in the adjustment speed to uncertainty shocks suggests a condition-specific policy — rather than a uniform policy intervention.
Published Version
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