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Endogenous Financial Uncertainty and Macroeconomic Volatility: Evidence from the United States

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  • Awijen, Haithem
  • Ben Zaied, Younes
  • Nguyen, Duc Khuong
  • Sensoy, Ahmet

Abstract

We propose an extended SVAR model to investigate the responses of the macroeconomic volatility to financial uncertainty shocks. The empirical model features the time-varying stochastic volatility-in-mean process where parameters allow for (i) the bilateral simultaneity between the shocks hitting the level and volatility of the endogenous variables, and (ii) the feedback from the endogenous variables to the volatility. Using the U.S. data, our findings show that macroeconomic volatility arises as an endogenous response to a rise in financial uncertainty. Moreover, shutting down the volatility feedback leads financial uncertainty shocks to react more strongly to macroeconomic variables. Consequently, the effects of financial uncertainty on macroeconomic volatility become more severe, especially in the short horizon.

Suggested Citation

  • Awijen, Haithem & Ben Zaied, Younes & Nguyen, Duc Khuong & Sensoy, Ahmet, 2020. "Endogenous Financial Uncertainty and Macroeconomic Volatility: Evidence from the United States," MPRA Paper 101276, University Library of Munich, Germany, revised Jun 2020.
    • Handle: RePEc:pra:mprapa:101276
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    More about this item

    Keywords

    Stochastic volatility; Bayesian SVAR; financial uncertainty; macroeconomic volatility.;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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