Uncertainty matters: evidence from close elections

This paper uses a data-rich environment to produce direct econometric estimates of macroeconomic and financial uncertainty for 11 advanced nations. These indices exhibit significant independent variation from popular proxies. Using this new data we control for both first and second moment financial shocks in identifying the real effects of macro uncertainty shocks. We further separate the identified macro shocks from financial shocks using narrative information, requiring that macro uncertainty rises during close elections. These are events which are likely to lead to macro uncertainty but are disjoint from a weakening in financial conditions. We find that macro uncertainty shocks matter for the vast majority of countries and that the real effects of macro uncertainty shocks are generally larger conditioning on close elections. These results are robust to controlling for credit spreads, financial uncertainty, global uncertainty and a measure of the first moment of the business cycle as proxied by a composite leading indicator.