Effects Of Uncertainty Shocks Research Articles

Heterogeneity in the effects of uncertainty shocks on labor market dynamics and extensive vs. intensive margins of adjustment

The real option value theory posits that non-convex adjustment costs pertaining to a firm's input are central to comprehending the consequences of increased uncertainty. This paper leverages the diversity observed at both sectoral and country levels in the degree of irreversibility associated with hiring and firing, a critical factor generating what is commonly referred to as “wait-and-see” behavior in times of heightened uncertainty. Our empirical findings reveal two key insights. First, in alignment with the concept of second-moment shocks, uncertainty shocks predominantly influence the labor market through the extensive margin rather than the intensive margin. Second, the effects of uncertainty shocks exhibit pronounced heterogeneity across countries and industries, and the adverse employment effects (extensive margin) are amplified in a country with strict employment protection or in an industry characterized by a higher natural layoff rate, consistent with the real option theory.

Commodity returns co-movement, uncertainty shocks, and the US dollar exchange rate

This study examines the time-varying effects of uncertainty shocks identified using the external instrument method on the broad-based movement of commodity returns since the early 1990s. We employ a vector autoregression augmented dynamic factor model with time-varying parameters and stochastic volatility to extract a common factor from 43 commodity returns. We find that uncertainty shocks reduce commodity returns across the board through this common factor and that their effects vary significantly over time, with a tendency to grow much stronger during recessions. Furthermore, uncertainty shocks often lead to dollar appreciation, so they can potentially account for the seemingly negative correlation between commodity returns and strength of the US dollar.

Exchange rate uncertainty and economic fluctuations in typical emerging economies

This paper examines the role of Exchange Rate Uncertainty (ERU) in driving economic fluctuations in emerging economies using a VAR with stochastic volatility in the mean. We use the quarterly data of three typical emerging economies from 1972Q3 to 2009Q4 within a VAR model. We show that ERU plays a vital role in driving the business cycles of emerging economies. First, an ERU can provoke risks in the financial market and the real economy. Second, ERU hurts equity prices and the output growth of emerging economies. Further investigation shows that the adverse effects of ERU on output are more severe under the fixed exchange rate regime than under the flexible exchange rate regime. This finding implies that adopting the flexible exchange rate regime can help emerging economies mitigate the adverse effects of uncertainty shocks.

On portfolio frictions, asset returns and volatility

We rationalize the observed short-run differences in corporate and long-term government bond yields in an financial-accelerator model with frictions that restrict changes in portfolio shares. We estimate the model on quarterly data for the Euro Area from 1999 to 2019, and show that the portfolio friction parameter is positive and significant. Portfolio frictions not only generate a time-varying wedge between the two returns that fits the data, but also raise the volatility of return differentials, and the precautionary motive of savers. As a result, the macroeconomic effects of uncertainty shocks are amplified by portfolio frictions.

A positive effect of uncertainty shocks on the economy: Is the chase over?

How large and persistent are the effects of uncertainty shocks on the economy? Are the effects of macroeconomic uncertainty shocks different from those of financial uncertainty shocks? In the empirical literature, there was a consensus on an estimated negative impact of uncertainty on macroeconomic variables. Recently, some studies identifying shocks with a novel methodology, namely the events constraint approach, find that macroeconomic uncertainty shocks may trigger an increase in the industrial production. The goal of this paper is to question this striking result. We have identified two main shortcomings in this literature that could explain the positive correlation between macroeconomic uncertainty and economic activity. We show that this method of identification can be sensitive depending on how to identify and select the structural uncertainty shocks in a SVAR model. Our main conclusion is that the controversial result of a positive effect of macroeconomic uncertainty on economic activity does not yet seem to be proven. Whether financial or macroeconomic, there is no evidence allowing for rejection of the hypothesis that they have a negative impact on economic activity.

The effects of uncertainty shocks on income and wealth inequality

ABSTRACT This paper assesses the impact of uncertainty on income and wealth inequality in Germany, France, Italy and Spain. For that purpose, mixed-frequency SVAR models are used. The results show that uncertainty shocks lead to heterogeneous responses across countries. A positive uncertainty shock increases income inequality in Spain, but reduces it in Germany and France. In the case of wealth, the response is statistically significant only in Spain and Italy, where an increase in inequality is experienced. Overall, these results highlight the important role of macroeconomic stabilisation policies in situations of high uncertainty.

Macroeconomic uncertainty and vector autoregressions

A procedure to estimate measures of macroeconomic uncertainty and compute the effects of uncertainty shocks based on standard VARs is proposed. Uncertainty and its effects are estimated using a single model so to ensure internal consistency. Under suitable assumptions, the procedure is equivalent to using the square of the VAR forecast error as an external instrument in a proxy SVAR. The procedure allows to add orthogonality constraints to the standard proxy SVAR identification scheme. The method is applied to a US data set; results show that macroeconomic uncertainty is responsible of a large fraction of business-cycle fluctuations while financial uncertainty plays a modest role.

Uncertainty shocks and employment fluctuations in Germany: the role of establishment size

Abstract Uncertainty shocks are found to affect labour market outcomes adversely. Most studies interrelate non-convex labour adjustment costs with the propagation of macroeconomic uncertainty to the labour market. I show that non-convex labour adjustment costs differ by establishment size in Germany. Hence, uncertainty shocks should affect large and small establishments differently. Therefore, this article studies the effects of uncertainty shocks on employment adjustments in large and small establishments employing four structural vector auto-regressive models for Germany from 1992 to 2014. These four models estimate the effects of uncertainty shocks on employment, worker flows, job flows, as well as worker churn in establishments with fewer than 100 and with at least 100 employees. The results suggest that uncertainty shocks trigger considerable employment fluctuations in large establishments while they barely affect small establishments. Furthermore, large establishments adjust their labour input by delaying the replacement of workers.

The macroeconomic effects of uncertainty and risk aversion shocks

This paper identifies two types of volatility shocks, namely quantity and price of risk shocks, which can intuitively be interpreted as uncertainty and risk aversion shocks, respectively. Identification is achieved in a shock-restricted SVAR framework using a combination of narrative and external variable restrictions. We find that uncertainty shocks have large negative effects on output, while risk aversion shocks are particularly damaging to asset prices and are deflationary. We also quantify to which extent the endogenous response of risk aversion can exacerbate the effects of uncertainty shocks, thereby providing an estimate of the quantitative relevance of the risk-premium channel of uncertainty shocks. A historical contribution exercise suggests that the GFC is best characterised by a combination of uncertainty and risk aversion shocks, while uncertainty shocks were more important than risk aversion shocks during the COVID pandemic.

Cross-Sectional Uncertainty and the Business Cycle: Evidence from 40 Years of Options Data

This paper presents a novel and unique measure of cross-sectional uncertainty constructed from stock options on individual firms. Cross-sectional uncertainty varied little between 1980 and 1995 and subsequently had three distinct peaks—during the tech boom, the financial crisis, and the coronavirus epidemic. Cross-sectional uncertainty has had a mixed relationship with overall economic activity, and aggregate uncertainty is much more powerful for forecasting aggregate growth. The data and moments can be used to calibrate and test structural models of the effects of uncertainty shocks. In international data, we find similar dynamics and a strong common factor in cross-sectional uncertainty. (JEL D21, D81, E23, E24, E32, G13, O34)

Uncertainty shocks in emerging economies: A global to local approach for identification

The paper investigates the effects of uncertainty shocks in emerging economies (EMEs). I construct novel measures of uncertainty for fifteen small EMEs and to address endogeneity I instrument them with fluctuations in global uncertainty. My results show that uncertainty shocks have substantial contractionary effects on GDP, stock prices and local currencies and the recessionary effect is much stronger in EMEs compared to advanced economies (AEs). I also estimate a negative co-movement between prices and output which triggers a delayed monetary tightening in correspondence to the inflationary peak. Counterfactual scenarios reveal that in the absence of uncertainty shocks, the fall in GDP recorded in EMEs during the 2008–2009 crisis would have been attenuated by around 2%.

The effects of uncertainty shocks: Implications of wealth inequality

This paper investigates whether and how the effects of time-varying macroeconomic uncertainty depend on the distribution of wealth. I show that increases in wealth inequality amplify the responses to uncertainty shocks. Using deciles of the distribution of wealth along with a series of macroeconomic volatility for the United States, I find that consumption growth falls by approximately 0.25 percentage points more in response to a one standard deviation uncertainty shock when wealth inequality is high relative to when it is low. In order to understand the nonlinear effects of uncertainty on consumption growth, I consider a two-agent New Keynesian model. I calibrate this simple model to qualitatively match the empirical responses of consumption growth to a one standard deviation uncertainty shock and show that nominal rigidities are key to magnifying the effects of uncertainty under high wealth inequality.

Measuring macroeconomic uncertainty: A cross-country analysis

This paper constructs internationally consistent measures of macroeconomic uncertainty. Our econometric framework extracts uncertainty from revisions in data obtained from standardized national accounts. Applying our model to post-WWII real-time data, we estimate macroeconomic uncertainty for 39 countries. The cross-country dimension of our uncertainty data allows us to study the impact of uncertainty shocks under varying degrees of employment protection legislation. Our empirical findings suggest that the effects of uncertainty shocks are stronger and more persistent in countries with low employment protection compared to countries with high employment protection. These empirical findings are in line with a theoretical model under varying firing cost.

Uncertainty Shocks and Corporate Borrowing Constraints

In this paper, we study the effects of uncertainty shocks in a quantitative framework where firms in the corporate sector are constrained by credit. Specifically, we formulate borrowing constraints as a nested function that features both earnings and capital as alternative instruments for assessing credit worthiness, in line with recent trends in corporate finance. We find that the quantitative framework that incorporates only one instrument (capital or earnings) in the borrowing constraint falls short in matching the business cycle properties of the US economy in terms of the behavior of output, inflation, and the price markup which are an essential part of the literature on uncertainty shocks. Rather, a hybrid formulation of the borrowing constraint which accounts for both capital and earnings helps us bring the results in the quantitative model closer to the data.

The Dynamic Impacts of Monetary Policy Uncertainty Shocks

This paper assesses whether the impact of monetary policy uncertainty on the U.S. economy has changed over time. Estimating a Time-Varying Parameter Vector Autoregressive model on U.S. data from 1985Q1 to 2022Q3, we find that uncertainty shocks have larger negative effects on output during the COVID-19 recession than during other periods. However, financial market variables, such as stock prices and dividends, responded more significantly to uncertainty shocks during the Asian crisis of the late 1990s, the IT bubble of the 2000s, and the Great Recession. We then develop a Dynamic Stochastic General Equilibrium model with monetary policy uncertainty. Based on the calibrated model, we conduct several counterfactual exercises to demonstrate that the effects of uncertainty shocks depend on the state of the economy, which is consistent with the empirical evidence. These findings provide new insights into the time-varying nature of the impact of economic uncertainty.

The effects of uncertainty shocks in the euro area

The effects of uncertainty shocks in the euro area

Uncertainty and demand for business loans: A study of selected countries in the euro area

This paper studies the effect of uncertainty shocks on the demand for business loans in individual euro area countries. The results of Bayesian vector autoregression (VAR) model impulse response functions show that in some countries the overall demand for business loans, and particularly the demand for business loans for fixed-investment financing, respond significantly negatively to the shock.

Macroeconomic effects of uncertainty shocks: Evidence from Korea

This paper proposes a new measure of economic policy uncertainty (EPU) for Korea by fine-tuning the keywords and exploiting information drawn from a wide variety of local newspapers. The uniqueness of our new EPU index lies mainly in the fact that it uses a set of keywords that correspond much more closely to actual language use and better reflect the economic environment of Korea, which is classified as a small open economy. After shocks to EPU being identified, we employ these shocks to estimate the impulse responses using local projections. Unlike the existing measure, our results show that shocks to EPU lead to a significant decline in macroeconomic aggregates such as output, consumption, investment, and employment. Thus our results suggest a refinement of the EPU index in general for other countries accordingly. We also develop policy-specific uncertainty indices and show that they capture important historical events related to the corresponding policies, such as monetary and fiscal measures.

When do Governments ‘Go Dark'? Evidence on Governments’ Disclosure Choices in Periods of Uncertainty

ABSTRACT We examine the effect of uncertainty shocks on the level of fiscal guidance – the guidance issued by governments on the expected evolution of the fiscal and economic outlook. Because uncertainty makes governments’ expectations less precise but potentially more valuable to users, we hypothesize that a disclosure dilemma leads governments to balance a higher demand for guidance with a higher probability of issuing inaccurate forecasts. Using natural disasters to randomize uncertainty shocks in our sample, we find that on average, governments issue less guidance in periods of uncertainty. The effect is driven by a reduction in the number of forecasts on the future evolution of balance sheet items, but only when governments have low refinancing needs and face a relatively quiet bond market. Instead, governments that maintain a stable level of guidance in periods of uncertainty appear to cater to coercive isomorphic pressures stemming from creditors. We further document that the relative ‘transparency’ of governments in periods of uncertainty is negatively related to indicators of fiscal reporting quality. Collectively, the evidence indicates that in the public sector, uncertainty leads to a trade-off between disclosure quantity and quality.

Oil Price Uncertainty Shocks and Global Equity Markets: Evidence from a GVAR Model

This paper examines the propagation of oil price uncertainty shocks to real equity prices using a large-scale Global Vector Autoregressive (GVAR) model of 26 advanced and emerging stock markets. The GVAR framework allows us to capture the transmission of local and global shocks, while simultaneously accounting for individual-country peculiarities. Utilising a recently developed model-free, robust estimate of oil price uncertainty, we document a statistically significant and negative effect of uncertainty shocks emanating from oil prices on the large majority of global stock markets, with the adverse effect of oil price uncertainty shocks found to be stronger for emerging economies as well as net oil-exporting nations. Interestingly, however, global stock markets exhibit a great deal of heterogeneity in their recovery following oil uncertainty shocks as some experience rapid corrections in stock valuations while others suffer from extended slumps. While the results are sensitive to the oil uncertainty measure utilised, they suggest that country diversification in the face of rising oil market uncertainty can still be beneficial for global investors as global stock markets exhibit a rather heterogeneous pattern in their recovery rates against oil market shocks.