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The Changing Macroeconomic Response to Stock Market Volatility Shocks

There is substantial consensus in the literature that positive uncertainty shocks predict a slowdown of economic activity. However, using U.S. data since 1950 we show that the macroeconomic response pattern to stock market volatility shocks has changed substantially over time. The negative response of GDP growth to such shocks has become smaller over time. Further, while during earlier parts of our sample both a slowdown in consumption and investment growth contribute to a reduction of GDP growth, during later parts, only the investment reaction contributes to the GDP slowdown. A variance decomposition for consumption growth shows that the contribution of stock market volatility becomes negligible as we go from earlier to later parts of the sample, while the corresponding decomposition for investment growth reveals an increase in the role of stock market volatility.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3652.

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Date of creation: 2011
Handle: RePEc:ces:ceswps:_3652
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  1. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
  2. Hassler, John, 2001. " Uncertainty and the Timing of Automobile Purchases," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(2), pages 351-66, June.
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  9. Edward S. Knotek II & Shujaat Khan, 2011. "How do households respond to uncertainty shocks?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II.
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  11. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
  12. Richard Clarida & Jordi Gali & Mark Gertler, 1997. "Monetary Policy Rules in Practice: Some International Evidence," NBER Working Papers 6254, National Bureau of Economic Research, Inc.
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  14. Ben S. Bernanke, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 98(1), pages 85-106.
  15. Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-51, December.
  16. James A. Kahn & Margaret M. McConnell & Gabriel Perez-Quiros, 2002. "On the causes of the increased stability of the U.S. economy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 183-202.
  17. Christopher D. Carroll & Andrew A. Samwick, 1995. "How Important is Precautionary Saving?," NBER Working Papers 5194, National Bureau of Economic Research, Inc.
  18. Michelle Alexopoulos & Jon Cohen, 2009. "Uncertain Times, uncertain measures," Working Papers tecipa-352, University of Toronto, Department of Economics.
  19. Christina D. Romer, 1990. "The Great Crash and the Onset of the Great Depression," The Quarterly Journal of Economics, Oxford University Press, vol. 105(3), pages 597-624.
  20. Barro, Robert J, 1990. "The Stock Market and Investment," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 115-31.
  21. Margaret M. McConnell & Gabriel Perez Quiros, 1998. "Output fluctuations in the United States: what has changed since the early 1980s?," Staff Reports 41, Federal Reserve Bank of New York.
  22. Hui Guo, 2002. "Stock market returns, volatility, and future output," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 75-86.
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