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Understanding Uncertainty Shocks

  • Laura Veldkamp

    (NYU Stern)

  • Anna Orlik

    (Federal Reserve Board of Governors)

For decades, macroeconomists have searched for shocks that are plausible drivers of business cycles. A recent advance in this quest has been to explore uncertainty shocks. Researchers use a variety of forecast and volatility data to justify heteroskedastic shocks in a model, which can then generate realistic cyclical uctuations. But the relevant measure of uncertainty in most models is the conditional variance of a forecast. When agents form such forecasts with state, parameter and model uncertainty, neither forecast dispersion nor innovation volatilities are good proxies for conditional forecast variance. We use observable data to select and estimate a forecasting model and then ask the model to inform us about what uncertainty shocks look like and why they arise.

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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 391.

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Date of creation: 2013
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Handle: RePEc:red:sed013:391
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Web page: http://www.EconomicDynamics.org/society.htm
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  1. Kristoffer Nimark, 2011. "Man-bites-dog business cycles," Economics Working Papers 1341, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2013.
  2. Susanto Basu & Brent Bundick, 2012. "Uncertainty Shocks in a Model of Effective Demand," NBER Working Papers 18420, National Bureau of Economic Research, Inc.
  3. Rüdiger Bachmann & Christian Bayer, 2011. "Investment Dispersion and the Business Cycle," NBER Working Papers 16861, National Bureau of Economic Research, Inc.
  4. Fernández-Villaverde, Jesús & Guerron-Quintana, Pablo A. & Rubio-Ramírez, Juan Francisco & Uribe, Martín, 2009. "Risk Matters: The Real Effects of Volatility Shocks," CEPR Discussion Papers 7264, C.E.P.R. Discussion Papers.
  5. Steffen Elstner & Eric Sims & Ruediger Bachmann, 2010. "Uncertainty and Economic Activity: Evidence from Business Survey Data," 2010 Meeting Papers 614, Society for Economic Dynamics.
  6. Benjamin Born & Alexandra Peter & Johannes Pfeifer, 2011. "Fiscal News and Macroeconomic Volatility," Bonn Econ Discussion Papers bgse08_2011, University of Bonn, Germany.
  7. Graham Elliott & Allan Timmermann, 2008. "Economic Forecasting," Journal of Economic Literature, American Economic Association, vol. 46(1), pages 3-56, March.
  8. Lars Peter Hansen, 2007. "Beliefs, Doubts and Learning: Valuing Macroeconomic Risk," American Economic Review, American Economic Association, vol. 97(2), pages 1-30, May.
  9. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
  10. Lars Peter Hansen, 2007. "Beliefs, Doubts and Learning: Valuing Economic Risk," NBER Working Papers 12948, National Bureau of Economic Research, Inc.
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