On Persistence of Uncertainty Shocks

I study real e ects of uncertainty shocks. Using time-varying volatility of the forecast error, I construct a two-part uncertainty metric that consists of persistent and volatile, burstlike components. These indices are used to study empirically several predictions of uncertainty models: that uncertainty shocks have real e ects, that these e ects realize in a downturn/overshoot pattern and that persistence of uncertainty shocks decreases this pattern's frequency and increases its amplitude. Using the constructed metric in a simple VAR framework I show that real e ects are there, that shock to the volatile uncertainty causes signi cant downturn/overshoot pattern, and that shock to the persistent component causes severe and prolonged damage.