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Uncertainty matters: evidence from a high-frequency identification strategy

Author

Listed:
  • Piergiorgio Alessandri

    (Bank of Italy)

  • Andrea Gazzani

    (Bank of Italy)

  • Alejandro Vicondoa

    (Instituto de Economía, Pontificia Universidad Católica de Chile)

Abstract

Assessing the role of uncertainty shocks as a driver of business cycle fluctuations is challenging because spikes in uncertainty often coincide with news about economic fundamentals. To tackle this problem, we exploit daily data to identify uncertainty shocks that (i) impact the VXO volatility index, and (ii) are statistically independent from level shocks affecting stock prices. We then use the identified series of uncertainty shocks in a monthly VAR to estimate their macroeconomic effects on the US economy. An exogenous increase in uncertainty depresses economic activity and prices, significantly affecting both labor and capital goods markets. Uncertainty shocks account for about 20% of the cyclical fluctuations in employment and industrial production.

Suggested Citation

  • Piergiorgio Alessandri & Andrea Gazzani & Alejandro Vicondoa, 2020. "Uncertainty matters: evidence from a high-frequency identification strategy," Temi di discussione (Economic working papers) 1284, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1284_20
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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2020/2020-1284/en_tema-1284.pdf
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    Cited by:

    1. Caggiano, Giovanni & Castelnuovo, Efrem & Delrio, Silvia & Kima, Richard, 2021. "Financial uncertainty and real activity: The good, the bad, and the ugly," European Economic Review, Elsevier, vol. 136(C).
    2. Piergiorgio Alessandri & Andrea Gazzani & Alejandro Vicondoa, 2021. "The real effects of financial uncertainty shocks: A daily identification approach," Working Papers 61, Red Nacional de Investigadores en Economía (RedNIE).
    3. Georgiadis, Georgios & Müller, Gernot J. & Schumann, Ben, 2024. "Global risk and the dollar," Journal of Monetary Economics, Elsevier, vol. 144(C).
    4. Efrem Castelnuovo, 2022. "Uncertainty Before and During COVID-19: A Survey," "Marco Fanno" Working Papers 0279, Dipartimento di Scienze Economiche "Marco Fanno".
    5. Alejandro Vicondoa & Andrea Gazzani, 2020. "Bridge Proxy-SVAR: Estimating the Macroeconomic Effects of Shocks Identified at High-Frequency," Documentos de Trabajo 533, Instituto de Economia. Pontificia Universidad Católica de Chile..
    6. Andrea Giovanni Gazzani & Alejandro Vicondoa, 2019. "Proxy-SVAR as a Bridge for Identification with Higher Frequency Data," 2019 Meeting Papers 855, Society for Economic Dynamics.

    More about this item

    Keywords

    uncertainty shocks; high-frequency identification; SVAR; business cycle;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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