Disentangling supply-side and demand-side effects of uncertainty shocks on U.S. financial markets: Identification using prices of gold and oil

This paper investigates the effects of uncertainty shocks on selected U.S. financial markets by decomposing a traditional uncertainty shock into its supply-side and demand-side components. Following Piffer and Podstawski (2018), we identify uncertainty shocks using gold prices and extend this approach by incorporating oil prices to disentangle their underlying sources. Oil prices appear to increase following supply-side uncertainty shocks (e.g., geopolitical conflicts or natural disasters) and to decline in response to demand-side uncertainty shocks (e.g., political or economic events). Exploiting this pattern, we construct proxy variables and estimate Bayesian VAR models to identify the two types of shocks. These findings imply that the decomposition of uncertainty shocks is particularly relevant for understanding short-term inflation expectations and may help explain “price puzzle” results when uncertainty is proxied by gold prices alone. The response of monetary policy seems to depend on the sample and thus the shocks under investigation.