Identifying Uncertainty Shocks Using the Price of Gold

Abstract

We propose a new strategy to identify the economic impact of uncertainty shocks in a SVAR. We identify the model using an external instrument, constructed by exploiting variations in the price of gold around selected events. The events capture periods of changes in uncertainty unrelated to other macroeconomic shocks. The variations in the gold price around such events proxy for the magnitude of the uncertainty shocks, due to the perception of gold as a safe haven asset. The proposed approach improves upon the recursive identification of uncertainty shocks as widely used in the literature by allowing for contemporaneous responses of all the variables included in the model. Replicating Bloom (2009), we find stronger effects of uncertainty shocks on the real economy and on the monetary policy rate.