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Uncertainty Shocks Are Aggregate Demand Shocks

  • Zheng Liu

    (Federal Reserve Bank of San Francisco)

  • Sylvain Leduc

    (Federal Reserve Bank of San Francisco)

We present empirical evidence and a theoretical argument that uncertainty shocks act like a negative aggregate demand shock, which raises unemployment and lowers inflation. We measure uncertainty using survey data from the United States and the United Kingdom. We estimate the macroeconomic effects of uncertainty shocks in a vector autoregression (VAR) model, exploiting the relative timing of the surveys and macroeconomic data releases for identification. Our estimation reveals that uncertainty shocks accounted for at least one percentage point increases in unemployment in the Great Recession and recovery, but did not contribute much to the 1981-82 recession. We present a DSGE model to show that, to understand the observed macroeconomic effects of uncertainty shocks, it is essential to have both labor search frictions and nominal rigidities.

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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 270.

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Date of creation: 2013
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Handle: RePEc:red:sed013:270
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  1. Jesús Fernández-Villaverde & Pablo A. Guerrón-Quintana & Keith Kuester & Juan Rubio-Ramírez, 2011. "Fiscal Volatility Shocks and Economic Activity," NBER Working Papers 17317, National Bureau of Economic Research, Inc.
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