IDEAS home Printed from https://ideas.repec.org/a/tpr/restat/v100y2018i5p799-815.html
   My bibliography  Save this article

Measuring Uncertainty and Its Impact on the Economy

Author

Listed:
  • Andrea Carriero

    (Queen Mary University of London)

  • Todd E. Clark

    (Federal Reserve Bank of Cleveland)

  • Massimiliano Marcellino

    (Bocconi University, IGIER, and CEPR)

Abstract

We propose a new model for measuring uncertainty and its effects on the economy, based on a large vector autoregression with stochastic volatility driven by common factors representing macroeconomic and financial uncertainty. The uncertainty measures reflect changes in both the conditional mean and volatility of the variables, and their impact on the economy can be assessed within the same framework. Estimates with U.S. data show substantial commonality in uncertainty, with sizable effects of uncertainty on key macroeconomic and financial variables. However, historical decompositions show a limited role of uncertainty shocks in macroeconomic fluctuations.

Suggested Citation

  • Andrea Carriero & Todd E. Clark & Massimiliano Marcellino, 2018. "Measuring Uncertainty and Its Impact on the Economy," The Review of Economics and Statistics, MIT Press, vol. 100(5), pages 799-815, December.
  • Handle: RePEc:tpr:restat:v:100:y:2018:i:5:p:799-815
    as

    Download full text from publisher

    File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/rest_a_00693
    Download Restriction: Access to PDF is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. N. Bloom, 2016. "Fluctuations in uncertainty," Voprosy Ekonomiki, NP Voprosy Ekonomiki, issue 4.
    2. Giuseppe Bertola & Luigi Guiso & Luigi Pistaferri, 2005. "Uncertainty and Consumer Durables Adjustment," Review of Economic Studies, Oxford University Press, vol. 72(4), pages 973-1007.
    3. Markku Lanne & Helmut Lütkepohl, 2008. "Identifying Monetary Policy Shocks via Changes in Volatility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(6), pages 1131-1149, September.
    4. Susanto Basu & Brent Bundick, 2017. "Uncertainty Shocks in a Model of Effective Demand," Econometrica, Econometric Society, vol. 85, pages 937-958, May.
    5. Caldara, Dario & Fuentes-Albero, Cristina & Gilchrist, Simon & Zakrajšek, Egon, 2016. "The macroeconomic impact of financial and uncertainty shocks," European Economic Review, Elsevier, vol. 88(C), pages 185-207.
    6. Alessandri, Piergiorgio & Mumtaz, Haroon, 2019. "Financial regimes and uncertainty shocks," Journal of Monetary Economics, Elsevier, vol. 101(C), pages 31-46.
    7. Domenico Giannone & Michele Lenza & Lucrezia Reichlin, 2008. "Explaining The Great Moderation: It Is Not The Shocks," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 621-633, 04-05.
    8. Caggiano, Giovanni & Castelnuovo, Efrem & Groshenny, Nicolas, 2014. "Uncertainty shocks and unemployment dynamics in U.S. recessions," Journal of Monetary Economics, Elsevier, vol. 67(C), pages 78-92.
    9. Apostolos Serletis, 2012. "Oil Price Uncertainty," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 8407, February.
    10. Marcellino, Massimiliano & Sivec, Vasja, 2016. "Monetary, fiscal and oil shocks: Evidence based on mixed frequency structural FAVARs," Journal of Econometrics, Elsevier, vol. 193(2), pages 335-348.
    11. Massimiliano Marcellino & Mario Porqueddu & Fabrizio Venditti, 2016. "Short-Term GDP Forecasting With a Mixed-Frequency Dynamic Factor Model With Stochastic Volatility," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 34(1), pages 118-127, January.
    12. Stock, James H. & Watson, Mark W., 2006. "Forecasting with Many Predictors," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 1, chapter 10, pages 515-554, Elsevier.
    13. Minchul Shin & Molin Zhong, 2020. "A New Approach to Identifying the Real Effects of Uncertainty Shocks," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 38(2), pages 367-379, April.
    14. Timothy Cogley & Thomas J. Sargent, 2005. "Drift and Volatilities: Monetary Policies and Outcomes in the Post WWII U.S," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 262-302, April.
    15. Sangjoon Kim & Neil Shephard & Siddhartha Chib, 1998. "Stochastic Volatility: Likelihood Inference and Comparison with ARCH Models," Review of Economic Studies, Oxford University Press, vol. 65(3), pages 361-393.
    16. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1593-1636.
    17. Andrea Carriero & Haroon Mumtaz & Konstantinos Theodoridis & Angeliki Theophilopoulou, 2015. "The Impact of Uncertainty Shocks under Measurement Error: A Proxy SVAR Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(6), pages 1223-1238, September.
    18. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348, National Bureau of Economic Research, Inc.
    19. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(1), pages 387-422.
    20. Joshua C. C. Chan, 2017. "The Stochastic Volatility in Mean Model With Time-Varying Parameters: An Application to Inflation Modeling," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 35(1), pages 17-28, January.
    21. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
    22. Mumtaz, Haroon & Theodoridis, Konstantinos, 2020. "Dynamic effects of monetary policy shocks on macroeconomic volatility," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 262-282.
    23. Sydney Ludvigson, 2016. "Uncertainty and Business Cycles: Exogenous Impulse or Endogenous Response," 2016 Meeting Papers 183, Society for Economic Dynamics.
    24. Siem Jan Koopman & Eugenie Hol Uspensky, 2002. "The stochastic volatility in mean model: empirical evidence from international stock markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(6), pages 667-689.
    25. R?diger Bachmann & Steffen Elstner & Eric R. Sims, 2013. "Uncertainty and Economic Activity: Evidence from Business Survey Data," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(2), pages 217-249, April.
    26. Eberly, Janice C, 1994. "Adjustment of Consumers' Durables Stocks: Evidence from Automobile Purchases," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 403-436, June.
    27. Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(3), pages 821-852.
    28. Jae Sim & Egon Zakrajsek & Simon Gilchrist, 2010. "Uncertainty, Financial Frictions, and Investment Dynamics," 2010 Meeting Papers 1285, Society for Economic Dynamics.
    29. James H. Stock & Mark W. Watson, 1989. "New Indexes of Coincident and Leading Economic Indicators," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 351-409, National Bureau of Economic Research, Inc.
    30. Giovanni Caggiano & Efrem Castelnuovo & Nicolas Groshenny, 2013. "Uncertainty Shocks and Unemployment Dynamics: An Analysis of Post-WWII U.S. Recessions," "Marco Fanno" Working Papers 0166, Dipartimento di Scienze Economiche "Marco Fanno".
    31. James H. Stock & Mark W. Watson, 2005. "Implications of Dynamic Factor Models for VAR Analysis," NBER Working Papers 11467, National Bureau of Economic Research, Inc.
    32. Valerie A. Ramey & Matthew D. Shapiro, 2001. "Displaced Capital: A Study of Aerospace Plant Closings," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 958-992, October.
    33. Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, vol. 96(1), pages 54-81, March.
    34. French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September.
    35. Christophe Andrieu & Arnaud Doucet & Roman Holenstein, 2010. "Particle Markov chain Monte Carlo methods," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 72(3), pages 269-342, June.
    36. Omori, Yasuhiro & Chib, Siddhartha & Shephard, Neil & Nakajima, Jouchi, 2007. "Stochastic volatility with leverage: Fast and efficient likelihood inference," Journal of Econometrics, Elsevier, vol. 140(2), pages 425-449, October.
    37. Stefano Giglio & Ian Dew-Becker & David Berger, 2016. "Contractionary Volatility or Volatile Contractions?," 2016 Meeting Papers 673, Society for Economic Dynamics.
    38. Elder, John, 2004. "Another Perspective on the Effects of Inflation Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 911-928, October.
    39. Alessandri, Piergiorgio & Mumtaz, Haroon, 2019. "Financial regimes and uncertainty shocks," Journal of Monetary Economics, Elsevier, vol. 101(C), pages 31-46.
    40. Ravi Bansal & Amir Yaron, 2004. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," Journal of Finance, American Finance Association, vol. 59(4), pages 1481-1509, August.
    41. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, March.
    42. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-162, April.
    43. Jacquier, Eric & Polson, Nicholas G. & Rossi, P.E.Peter E., 2004. "Bayesian analysis of stochastic volatility models with fat-tails and correlated errors," Journal of Econometrics, Elsevier, vol. 122(1), pages 185-212, September.
    44. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Awijen, Haithem & Ben Zaied, Younes & Nguyen, Duc Khuong & Sensoy, Ahmet, 2020. "Endogenous Financial Uncertainty and Macroeconomic Volatility: Evidence from the United States," MPRA Paper 101276, University Library of Munich, Germany, revised Jun 2020.
    2. Josué Diwambuena & Jean-Paul K. Tsasa, 2021. "The Real Effects of Uncertainty Shocks: New Evidence from Linear and Nonlinear SVAR Models," BEMPS - Bozen Economics & Management Paper Series BEMPS87, Faculty of Economics and Management at the Free University of Bozen.
    3. Giovanni Caggiano & Efrem Castelnuovo & Gabriela Nodari, 2014. "Uncertainty and Monetary Policy in Good and Bad Times," "Marco Fanno" Working Papers 0188, Dipartimento di Scienze Economiche "Marco Fanno".
    4. Magnus Reif, 2020. "Macroeconomics, Nonlinearities, and the Business Cycle," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 87.
    5. Danilo Cascaldi-Garcia, 2017. "Amplification effects of news shocks through uncertainty," 2017 Papers pca1251, Job Market Papers.
    6. Caggiano, Giovanni & Castelnuovo, Efrem & Pellegrino, Giovanni, 2017. "Estimating the real effects of uncertainty shocks at the Zero Lower Bound," European Economic Review, Elsevier, vol. 100(C), pages 257-272.
    7. Jesus Fernandez-Villaverde & Pablo Guerron-Quintana, 2020. "Uncertainty Shocks and Business Cycle Research," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 118-166, August.
    8. Carriero, Andrea & Clark, Todd E. & Marcellino, Massimiliano, 2021. "Using time-varying volatility for identification in Vector Autoregressions: An application to endogenous uncertainty," Journal of Econometrics, Elsevier, vol. 225(1), pages 47-73.
    9. Prüser, Jan & Schlösser, Alexander, 2018. "On the time-varying effects of economic policy uncertainty on the US economy," Ruhr Economic Papers 761, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    10. Luca Gambetti & Dimitris Korobilis & John D. Tsoukalas & Francesco Zanetti, 2023. "Agreed and Disagreed Uncertainty," Working Paper series 23-01, Rimini Centre for Economic Analysis.
    11. Dario Caldara & Chiara Scotti & Molin Zhong, 2021. "Macroeconomic and Financial Risks: A Tale of Mean and Volatility," International Finance Discussion Papers 1326, Board of Governors of the Federal Reserve System (U.S.).
    12. Laurent Ferrara & Stéphane Lhuissier & Fabien Tripier, 2018. "Uncertainty Fluctuations: Measures, Effects and Macroeconomic Policy Challenges," Financial and Monetary Policy Studies, in: Laurent Ferrara & Ignacio Hernando & Daniela Marconi (ed.), International Macroeconomics in the Wake of the Global Financial Crisis, pages 159-181, Springer.
    13. Stéphane Lhuissier & Fabien Tripier, 2021. "Regime‐dependent effects of uncertainty shocks: A structural interpretation," Quantitative Economics, Econometric Society, vol. 12(4), pages 1139-1170, November.
    14. Pfarrhofer, Michael, 2019. "Measuring international uncertainty using global vector autoregressions with drifting parameters," Working Papers in Economics 2019-3, University of Salzburg.
    15. Jan Prüser & Alexander Schlösser, 2020. "On the Time‐Varying Effects of Economic Policy Uncertainty on the US Economy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 82(5), pages 1217-1237, October.
    16. Andrea Carriero & Francesco Corsello & Massimiliano Marcellino, 2022. "The global component of inflation volatility," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 37(4), pages 700-721, June.
    17. Jamie L. Cross & Chenghan Hou & Aubrey Poon, 2018. "International Transmission of Macroeconomic Uncertainty in Small Open Economies: An Empirical Approach," Working Papers No 12/2018, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    18. Steffen R. Henzel & Malte Rengel, 2017. "Dimensions Of Macroeconomic Uncertainty: A Common Factor Analysis," Economic Inquiry, Western Economic Association International, vol. 55(2), pages 843-877, April.
    19. Michele Piffer & Maximilian Podstawski, 2018. "Identifying Uncertainty Shocks Using the Price of Gold," Economic Journal, Royal Economic Society, vol. 128(616), pages 3266-3284, December.
    20. Minchul Shin & Molin Zhong, 2020. "A New Approach to Identifying the Real Effects of Uncertainty Shocks," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 38(2), pages 367-379, April.

    More about this item

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tpr:restat:v:100:y:2018:i:5:p:799-815. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kelly McDougall (email available below). General contact details of provider: https://direct.mit.edu/journals .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.