Uncertainty across volatility regimes

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Title: Uncertainty across volatility regimes
Author: Angelini, Giovanni ; Bacchiocchi, Emanuele ; Caggiano, Giovanni ; Fanelli, Luca
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
Series number: 35/2017
Year of publication: 2017
Publication date: 30.11.2017
Pages: 78
Subject (yso): epävarmuus; häiriöt; makrotalous
JEL: C32; C51; E44; G01
Other keywords: heteroskedasticity; identification; non-recursive SVAR; uncertainty shocks; volatility regime
Abstract: We propose a new non-recursive identification scheme for uncertainty shocks, which exploits breaks in the unconditional volatility of macroeconomic variables. Such identification approach allows us to simultaneously address two major questions in the empirical literature on uncertainty: (i) Does the relationship between uncertainty and economic activity change across macroeconomic regimes? (ii) Is uncertainty a major cause or effect (or both) of decline in economic activity? Empirical results based on a small-scale VAR with US monthly data for the period 1960-2015 suggest that (i) the effects of uncertainty shocks are regime-dependent, and (ii) uncertainty is an exogenous source of decline of economic activity, rather than an endogenous response to it.
Rights: https://helda.helsinki.fi/bof/copyright

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