Effects Of Uncertainty Shocks Research Articles

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.

News-Driven Uncertainty Fluctuations

We investigate the channels through which news influences the subjective beliefs of economic agents, with a particular focus on their subjective uncertainty. The main insight of the article is that news that is more at odds with agents’ prior beliefs generates an increase in uncertainty; news that is more consistent with their prior beliefs generates a decrease in uncertainty. We illustrate this insight theoretically and then estimate the model empirically using data on U.S. output and professional forecasts to provide novel measures of news shocks and uncertainty. We then estimate impulse responses from the identified shocks to show that news shocks can affect macroeconomic variables in ways that resemble the effects of uncertainty shocks. Our results suggest that controlling for news can potentially diminish the estimated effects of uncertainty shocks on real variables, particularly at longer horizons.

How does oil price volatility affect unemployment rates? A dynamic stochastic general equilibrium model

Although empirical evidence reveals a strong correlation between oil price volatility and unemployment, the transmission mechanism of these two variables is unclear. We theoretically examine the effects of oil price uncertainty shocks on the unemployment rate using a dynamic stochastic general equilibrium model incorporating a search-and-match component. We find that an unexpected increase in oil price volatility leads to a persistent increase in the unemployment rate. Comparing the oil price uncertainty shock with supply and demand uncertainty shocks in the final goods market, we observe that the oil price uncertainty shock has effects analogous to those of the supply uncertainty shock. In addition, we demonstrate that oil as a production input mitigates the adverse effects of uncertainty shocks to supply and demand sides of final goods market.

The financial US uncertainty spillover multiplier: Evidence from a GVAR model

AbstractThis study examines the role of the global financial cycle (GFCy) in the propagation of uncertainty shocks from the United States to other national economies using a large‐scale global vector autoregressive model of 33 countries. Although the dominant role of US uncertainty over global economic dynamics is established, the findings highlight the moderating role of the GFCy in the spillover effects of uncertainty shocks. The US uncertainty shocks, compared with own‐domestic uncertainty shocks, are found to have a more prominent negative impact on output during stressed market conditions, implied by low values of the GFCy, while the impact turns largely insignificant during high GFCy states. The findings provide evidence in favour of a US uncertainty spillover multiplier, suggesting that the design of monetary policy as a response to US uncertainty needs to be contingent on the state of the integrated global financial markets, captured by the GFCy.

Measuring International Uncertainty Using Global Vector Autoregressions with Drifting Parameters

AbstractThis study investigates the time-varying effects of international uncertainty shocks. I use a global vector autoregressive model with drifting coefficients and factor stochastic volatility in the errors to model the G7 economies jointly. The measure of uncertainty is constructed by estimating a time-varying scalar driving the innovation variances of the latent factors, which is also included in the conditional mean of the process. To achieve regularization, I use Bayesian techniques for estimation, and rely on hierarchical global–local priors to shrink the high-dimensional multivariate system towards sparsity. I compare the obtained econometric measure of uncertainty to alternative indices and discuss commonalities and differences. Moreover, I find that international uncertainty may differ substantially compared to identically constructed domestic measures. Structural inference points towards pronounced real and financial effects of uncertainty shocks in all considered economies. These effects are subject to heterogeneities over time and the cross-section, providing empirical evidence in favor of using the flexible econometric framework introduced in this study.

Exploring the asymmetric impact of economic policy uncertainty on China's carbon emissions trading market price: Do different types of uncertainty matter?

Carbon allowance is a market mechanism that is used to deal with climate change in the scientific community, and is gradually regarded as a financial asset. Uncertainty plays a vital role in affecting financial assets, and whether it affects carbon prices is an important question. Therefore, this article aims to examine the impact of four economic policy uncertainties (EPU) on China's carbon emissions trading (CET) market price from the year 2013 to 2021, by employing the nonlinear ARDL model and the asymmetric causality test. Empirical results show that the trade policy uncertainty (TPU) and monetary policy uncertainty (MPU), both positively affect the CET market price, while the exchange rate policy uncertainty (ECPU) comes with negative influences. Furthermore, the increase of TPU, MPU, and ECPU has a greater impact on the CET price. Our findings are consistent with the real effects of uncertainty shocks by Bloom (2009) who asserts that the uncertainty transfer mechanism has an asymmetric pattern. Therefore, policymakers should pay careful attention to the increasing fluctuations of different economic policies. Moreover, Chinese authorities should adopt firmer policy stances to avoid high volatility in the CET market price to achieve the goal of low-cost emission reductions through market mechanisms.

Time-varying effect of uncertainty shocks on unemployment

We examine the dynamic effects of uncertainty shocks on unemployment during recessions in the US. We estimate a Bayesian time-varying parameter structural vector autoregression. We analyze how the impact of uncertainty shocks on U.S. unemployment changes over time. We find that uncertainty shocks have both higher unit impact and higher total effect on unemployment during the Great Recession compared to those of previous recessions. Different characteristics of the Great Recession amplify the effect of uncertainty on unemployment. Two channels distinguish the Great Recession from other recessions: the federal funds rate hitting the zero lower bound and financial frictions. We find that these factors are significant determinants of the time-varying relationship between unemployment and uncertainty. Robustness analyses with alternative measures of uncertainty and alternative empirical specifications validate the results of the paper. • Uncertainty significantly affects US unemployment. • The effect of uncertainty on unemployment varies over time. • The effect is substantially higher during the Great Recession. • The zero lower bound and financial frictions are among the causes of time-varying effect.

Uncertainty Shocks, Innovation, and Productivity

Abstract In this paper, we argue that macroeconomic uncertainty shocks cause a persistent decline in economic activity, investment in R&D, and total factor productivity. After providing empirical evidence, we build a DSGE model with sticky prices and endogenous growth through investment in R&D. In this framework, uncertainty shocks lead to a short-term fall in demand because of precautionary savings and rising markups. The reduction in the utilised aggregate stock of R&D determines a fall in productivity, which causes a long-term reduction in the main macroeconomic aggregates. When households feature Epstein–Zin preferences, they become averse to these long-term risks affecting their consumption process (long-run risk channel), which severely exacerbates the precautionary savings motive and the overall adverse effects of uncertainty shocks.

The Effects of Uncertainty Shocks on Income and Wealth Inequality

The Effects of Uncertainty Shocks on Income and Wealth Inequality

Uncertainty Shocks in Emerging Economies: A Global to Local Approach for Identification

The paper investigates the effects of uncertainty shocks in emerging economies (EMEs). We construct a global uncertainty indicator as well as country uncertainty measures for fifteen relatively small emerging economies. We adopt an instrumental variable approach to identify exogenous uncertainty shocks in the EMEs. To deal with the data limitations specific to emerging countries, we develop a new Bayesian algorithm to estimate a proxy panel structural vector autoregressive (SVAR) model. We find that uncertainty shocks in EMEs cause severe falls in GDP and stock price indexes, generate inflation, depreciate the currency and are not followed by a subsequent overshoot in activity. Estimation implies considerable heterogeneity across economies in the response to uncertainty shocks which can be (in part) explained by country characteristics.

Nonlinear Effects of Uncertainty Shocks: State-Dependency and Asymmetry

Nonlinear Effects of Uncertainty Shocks: State-Dependency and Asymmetry

Foreign and Domestic Uncertainty Shocks in Four Open Economies

This paper investigates how the economic performance of four economies with floating exchange rates is affected by shocks in domestic and US economic policy uncertainty. We estimate a Bayesian VAR model describing the dynamics of ten local and US variables for each of the four countries and use it to evaluate the response of the system to structural shocks. The analysis reveals that increased economic uncertainty in the US reduces industrial output in all the countries analysed, while the effect of increased domestic uncertainty varies across the economies. A key finding concerns the role of the exchange rate. Whereas the real effective exchange rate amplifies the effect of uncertainty shocks in the US, it typically helps absorb shocks in the open economies. This asymmetry may reflect the role of the US as a safe haven in times of increased uncertainty.Supplementary InformationThe online version contains supplementary material available at 10.1007/s11079-021-09656-0.

Uncertainty and monetary policy in good and bad times: A replication of the vector autoregressive investigation by Bloom (2009)

SummaryThis paper revisits the well‐known vector autoregressive (VAR) evidence on the real effects of uncertainty shocks by Bloom (2009, https://doi.org/10.3982/ECTA6248). We replicate the results in a narrow sense using EViews. In a wide sense, we extend his study by working with a smooth transition VAR framework that allows for business cycle‐dependent macroeconomic responses to an uncertainty shock. We find a significantly stronger response of real activity in recessions. Counterfactual simulations point to a greater effectiveness of systematic monetary policy in stabilizing real activity in expansions.

Asymmetric effects of uncertainty shocks: Normal times and financial disruptions are different

We examine whether the response of the euro area economy to uncertainty shocks depends on financial conditions. We find strong evidence that uncertainty shocks have much more powerful effects on key macroeconomic variables in episodes marked by financial distress than in normal times. We also document that the recovery of economic activity following an adverse uncertainty shock is state dependent: it is gradual in normal times, but displays a more accelerated rebound when the shock hits during financial distress, reflecting monetary accommodation provided by the central bank. These findings are based on a non-linear data-driven model that accounts for regime switching and time-varying volatility. Our findings imply that whether financial markets are calm or distressed matters when it comes to the appropriate policy responses to uncertainty shocks.

Uncertainty, Financial Markets, and Monetary Policy over the Last Century

Abstract What has been the effect of uncertainty shocks in the U.S. economy over the last century? What are the roles of the financial channel and monetary policy channel in propagating uncertainty shocks? Our empirical strategies enable us to distinguish between the effects of uncertainty shocks on key macroeconomic and financial variables transmitted through each channel. A hundred years of data further allow us to answer these questions from a novel historical perspective. This paper finds robust evidence that financial conditions captured by both borrowing costs and the availability of credit have played a crucial role in propagating uncertainty shocks over the last century. However, heightened uncertainty does not necessarily amplify the adverse effect of financial shocks, suggesting an asymmetric interaction between uncertainty and financial shocks. Interestingly, the monetary policy stance seems to play only a minor role in propagating uncertainty shocks, which is in sharp contrast to the recent claim that binding zero-lower-bound amplifies the negative effect of uncertainty shocks. We argue that the contribution of constrained monetary policy to amplifying uncertainty shocks is largely masked by the joint concurrence of binding zero-lower-bound and tightened financial conditions.

Economic policy uncertainty and gold return dynamics: Evidence from high-frequency data

This paper examines the dynamic effect of economic policy uncertainty (EPU) on return and volatility in gold futures via the time varying parameter VAR (TVP-VAR) model with stochastic volatility applied to high-frequency data. We show that the impulse responses of gold returns and volatility to EPU shocks are time-varying and exhibit asymmetric patterns alternately over the sample period. While the effect of EPU on gold volatility is generally stronger in the intermediate to long horizons, the opposite is observed in the case of gold returns, underscoring the additive effects of uncertainty shocks on gold market volatility. The effect of EPU on gold volatility is found to be asymmetric with respect to the nature of shocks and stronger in times of crisis or major events, with such events implied by high EPU values associated with positive volatility jumps in the gold market. Our findings have significant implications for the valuation of gold derivatives and the effectiveness of gold as a potential hedge for financial investors and suggest that investors may risk mis-valuations and consequently, ineffective and costly hedges in response to uncertainty shocks if the time-variation in the response of gold return dynamics to uncertainty shocks is ignored.

Uncertainty shocks and inflation dynamics in the U.S.

We estimate a time-varying parameter VAR (TVP-VAR) with stochastic volatility using U.S. data to study the effects of uncertainty shocks on inflation. We find the response of inflation to be negative in the post-WWII period. Our findings suggest that uncertainty shocks propagate like aggregate demand shocks and not like aggregate supply shocks.

Regime‐dependent effects of uncertainty shocks: A structural interpretation

Using a Markov‐switching VAR, we show that the effects of uncertainty shocks on output are four times higher in a regime of economic distress than in a tranquil regime. We then provide a structural interpretation of these facts. To do so, we develop a business cycle model in which agents are aware of the possibility of regime changes when forming expectations. The model is estimated using a Bayesian minimum distance estimator that minimizes, over the set of structural parameters, the distance between the regime‐switching VAR‐based impulse response functions and those implied by the model. Our results point to worsening credit‐market conditions that amplify shocks during distress periods. Finally, we show that the expectation effect of regime switching in financial conditions is an important component of the financial accelerator mechanism. If agents are more pessimistic about future financial conditions, then the output effects of shocks are amplified.

Uncertainty‐driven business cycles: Assessing the markup channel

Precautionary pricing and increasing markups in representative‐agent DSGE models with nominal rigidities are commonly used to generate negative output effects of uncertainty shocks. We assess whether this theoretical model channel is consistent with the data. Three things stand out. First, consistent with precautionary wage setting, we find that wage markups increase after uncertainty shocks. Second, the impulse responses of price markups are largely inconsistent with the standard model, both at the aggregate as well as the industry level. Finally, and in contrast to times‐series evidence, our theoretical model robustly predicts that uncertainty shocks have a quantitatively small impact on the economy.