Macro Uncertainty in the Long Run

The relationship between uncertainty and economic activity has attracted substantial interest in recent macroeconomics literature. Empirical work has mostly focused on short-run and medium-term effects of uncertainty shocks. However, there are a number of mechanisms that may cause a response of output also at longer horizons, e.g. the “real option” or the “growth option” channels. This paper explores the effects that Macro uncertainty shocks can have at very long horizons. It does so using a model with a dynamic specification rich enough to allow the effects of uncertainty to propagate far in the future. The potential overfitting issue is dealt with using Bayesian shrinkage. We find evidence that uncertainty shocks produce two waves of reduction in output: a short run reduction that materializes within the first three years, and a long run reduction which reaches its trough after approximately eight years from the shock.