TRANSMISSION CHAINS OF ECONOMIC UNCERTAINTY ON MACROECONOMIC ACTIVITY: NEW EMPIRICAL EVIDENCE

Abstract

This paper investigates the macroeconomic impact of uncertainty by using three recently constructed US economic uncertainty proxies. Emphasis is placed on examining the informational value of these indicators and their ability to better predict economic activity. We focus on the direct and/or indirect transmission chains of economic uncertainty on US macroeconomic aggregates, the magnitude of the forecast improvement induced by economic uncertainty and the strength of the observed dynamic relations. Our results show that macroeconomic uncertainty can help in forecasting key macroeconomic aggregates across multiple horizons, and this predictive power is economically and statistically significant. The two macroeconomic uncertainty measures anticipate industrial production and consumption directly, and investment and employment indirectly, with a time-delay. The transmission chains for investment include consumption and the stock market as intermediate variables, and for employment consumption and investment. No substantial evidence of feedback effects from real activity to macroeconomic uncertainty is found. Moreover, asymmetry in macroeconomic uncertainty is found to be important. Upside and downside uncertainty produce significant macroeconomic effects, yet downside uncertainty produces the strongest impact. Results from a “news-based” economic policy uncertainty measure are weaker.