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The macroeconomic effects of uncertainty shocks: The role of the financial channel

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  • Popp, Aaron
  • Zhang, Fang

Abstract

This paper studies the macroeconomic effects of uncertainty shocks with an emphasis on the interaction between elevated uncertainty and credit market conditions when the economy is in different regimes (recessions vs. non-recessions). We use a smooth-transition factor-augmented vector autoregression (ST-FAVAR) and a large monthly panel of U.S. macroeconomic and financial indicators in our estimation. Our findings are twofold. First, while an unanticipated increase in uncertainty has adverse effects on the real economy and financial markets, the effects are quantitatively larger during recessions. Second, the financial channel is important in the transmission of uncertainty shocks, with a greater role during recessions and in the short run.

Suggested Citation

  • Popp, Aaron & Zhang, Fang, 2016. "The macroeconomic effects of uncertainty shocks: The role of the financial channel," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 319-349.
    • Handle: RePEc:eee:dyncon:v:69:y:2016:i:c:p:319-349
    DOI: 10.1016/j.jedc.2016.05.021
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    More about this item

    Keywords

    Uncertainty shocks; Credit spread; Recessions; Smooth-transition vector autoregression; Dynamic factor analysis;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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