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Understanding Uncertainty Shocks

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  • Laura Veldkamp

    (NYU Stern)

  • Anna Orlik

    (Federal Reserve Board of Governors)

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    Abstract

    For decades, macroeconomists have searched for shocks that are plausible drivers of business cycles. A recent advance in this quest has been to explore uncertainty shocks. Researchers use a variety of forecast and volatility data to justify heteroskedastic shocks in a model, which can then generate realistic cyclical uctuations. But the relevant measure of uncertainty in most models is the conditional variance of a forecast. When agents form such forecasts with state, parameter and model uncertainty, neither forecast dispersion nor innovation volatilities are good proxies for conditional forecast variance. We use observable data to select and estimate a forecasting model and then ask the model to inform us about what uncertainty shocks look like and why they arise.

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 391.

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    Date of creation: 2013
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    Handle: RePEc:red:sed013:391

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    References

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    1. Graham Elliott & Allan Timmermann, 2008. "Economic Forecasting," Journal of Economic Literature, American Economic Association, vol. 46(1), pages 3-56, March.
    2. Steffen Elstner & Eric Sims & Ruediger Bachmann, 2010. "Uncertainty and Economic Activity: Evidence from Business Survey Data," 2010 Meeting Papers 614, Society for Economic Dynamics.
    3. Born, Benjamin & Peter, Alexandra & Pfeifer, Johannes, 2013. "Fiscal news and macroeconomic volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2582-2601.
    4. Susanto Basu & Brent Bundick, 2012. "Uncertainty shocks in a model of effective demand," Working Papers 12-15, Federal Reserve Bank of Boston.
    5. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
    6. RĂ¼diger Bachmann & Christian Bayer, 2011. "Investment Dispersion and the Business Cycle," NBER Working Papers 16861, National Bureau of Economic Research, Inc.
    7. Kristoffer Nimark, 2013. "Man-Bites-Dog Business Cycle," Working Papers 700, Barcelona Graduate School of Economics.
    8. Lars Peter Hansen, 2007. "Beliefs, Doubts and Learning: Valuing Macroeconomic Risk," American Economic Review, American Economic Association, vol. 97(2), pages 1-30, May.
    9. Lars Peter Hansen, 2007. "Beliefs, Doubts and Learning: Valuing Economic Risk," NBER Working Papers 12948, National Bureau of Economic Research, Inc.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Understanding Uncertainty Shocks
      by Christian Zimmermann in NEP-DGE blog on 2013-11-04 05:53:18
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    Cited by:
    1. Hikaru Saijo, 2013. "The Uncertainty Multiplier and Business Cycles," UTokyo Price Project Working Paper Series 017, University of Tokyo, Graduate School of Economics.

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