Macro uncertainty in the long run

Abstract

The relationship between uncertainty and economic activity has attracted substantial interest in recent macroeconomics literature. Empirical work has mostly focused on short-run effects of uncertainty. However, there are many mechanisms that may cause non zero responses at longer horizons, e.g. the “real option” or the “growth option” channels. This paper explores the consequences of Macro uncertainty shocks at very long horizons using models with dynamic specifications rich enough to allow the effects of uncertainty to propagate far in the future. We find that uncertainty shocks produce two waves of reduction in output: one at short horizons, and another which reaches its trough after eight years from the shock.