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The Real Effects of Financial Uncertainty Shocks: A Daily Identification Approach

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  • Piergiorgio Alessandri
  • Andrea Gazzani
  • Alejandro Vicondoa

Abstract

Isolating financial uncertainty shocks is difficult because financial markets rapidly price changes in several economic fundamentals. To bypass this difficulty, we identify uncertainty shocks using daily data and use their monthly averages as an instrument in a VAR. We show that this novel approach is theoretically appealing and has dramatic implications for leading empirical studies on financial uncertainty. Daily interactions between equity returns, bond spreads and expected volatility cause previous identification schemes to fail at the monthly frequency. Once these interactions are explicitly modeled, the impact of uncertainty shocks on output and inflation is significant and similar across specifications.

Suggested Citation

  • Piergiorgio Alessandri & Andrea Gazzani & Alejandro Vicondoa, 2021. "The Real Effects of Financial Uncertainty Shocks: A Daily Identification Approach," Documentos de Trabajo 559, Instituto de Economia. Pontificia Universidad Católica de Chile..
  • Handle: RePEc:ioe:doctra:559
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    Cited by:

    1. Luca Fanelli & Antonio Marsi, 2021. "Unconventional Monetary Policy in the Euro Area: A Tale of Three Shocks," Working Papers wp1164, Dipartimento Scienze Economiche, Universita' di Bologna.

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    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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