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Uncertainty Shocks Are Aggregate Demand Shocks

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  • Zheng Liu

    (Federal Reserve Bank of San Francisco)

  • Sylvain Leduc

    (Federal Reserve Bank of San Francisco)

Abstract

We present empirical evidence and a theoretical argument that uncertainty shocks act like a negative aggregate demand shock, which raises unemployment and lowers inflation. We measure uncertainty using survey data from the United States and the United Kingdom. We estimate the macroeconomic effects of uncertainty shocks in a vector autoregression (VAR) model, exploiting the relative timing of the surveys and macroeconomic data releases for identification. Our estimation reveals that uncertainty shocks accounted for at least one percentage point increases in unemployment in the Great Recession and recovery, but did not contribute much to the 1981-82 recession. We present a DSGE model to show that, to understand the observed macroeconomic effects of uncertainty shocks, it is essential to have both labor search frictions and nominal rigidities.

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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 270.

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Date of creation: 2013
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Handle: RePEc:red:sed013:270

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  1. Carl E. Walsh, 2005. "Labor Market Search, Sticky Prices, and Interest Rate Policies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(4), pages 829-849, October.
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  9. Steffen Elstner & Eric Sims & Ruediger Bachmann, 2010. "Uncertainty and Economic Activity: Evidence from Business Survey Data," 2010 Meeting Papers 614, Society for Economic Dynamics.
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  16. Francois Gourio, 2009. "Disaster risk and business cycles," 2009 Meeting Papers 1176, Society for Economic Dynamics.
  17. Alan J. Auerbach & Yuriy Gorodnichenko, 2010. "Measuring the Output Responses to Fiscal Policy," NBER Working Papers 16311, National Bureau of Economic Research, Inc.
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Cited by:
  1. Sylvain Leduc & Zheng Liu, 2012. "Uncertainty, unemployment, and inflation," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue sep17.
  2. Hideaki Hirata & M. Ayhan Kose & Christopher Otrok & Marco E. Terrones, 2012. "Global House Price Fluctuations: Synchronization and Determinants," NBER Chapters, in: NBER International Seminar on Macroeconomics 2012, pages 119-166 National Bureau of Economic Research, Inc.
  3. Dario Bonciani & Björn van Roye, 2013. "Uncertainty shocks, banking frictions, and economic activity," Kiel Working Papers 1843, Kiel Institute for the World Economy.
  4. Klodiana Istrefi & Anamaria Piloiu, 2013. "Economic Policy Uncertainty, Trust and Inflation Expectations," CESifo Working Paper Series 4294, CESifo Group Munich.
  5. Chiara Scotti, 2013. "Surprise and uncertainty indexes: real-time aggregation of real-activity macro surprises," International Finance Discussion Papers 1093, Board of Governors of the Federal Reserve System (U.S.).
  6. Bijsterbosch, Martin & Guérin, Pierre, 2013. "Characterizing very high uncertainty episodes," Economics Letters, Elsevier, vol. 121(2), pages 239-243.
  7. repec:fip:fedfsp:y:2013:i:jan.14 is not listed on IDEAS
  8. Lillie Lam & James Yetman, 2013. "Asia’s decoupling: fact, forecast or fiction?," BIS Working Papers 438, Bank for International Settlements.
  9. Hideaki Hirata & M. Ayhan Kose & Christopher Otrok & Marco Terrones, 2013. "Global House Price Fluctuations," IMF Working Papers 13/38, International Monetary Fund.
  10. John C. Williams, 2013. "The economy and monetary policy in uncertain times," Speech 115, Federal Reserve Bank of San Francisco.

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