The Impact of Uncertainty and Financial Shocks in Recessions and Booms

The literature has widely discussed the role of financial and economic uncertainty shocks for the macroeconomy. However, empirically isolating them is difficult and uncertainty is increasingly considered as endogenous with respect to financial and other shocks. To obtain a more complete picture I model financial and uncertainty shocks jointly in a state-dependent FAVAR setup and provide agnostic identification bounds on their effects. Results for the U.S. document that (i) uncertainty shocks are of limited relevance for real activity and asset prices in boom periods but have significantly contractionary effects in recessions. (ii) By comparison, financial shocks have higher explanatory power for asset prices and are contractionary both in recessions and boom periods. (iii) Financial conditions are key for understanding uncertainty shocks. (iv) Uncertainty transmits financial shocks to a notable degree in recessions.