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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
Date of revision:
Handle: RePEc:red:sed013:391
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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  1. Lars Peter Hansen, 2007. "Beliefs, Doubts and Learning: Valuing Macroeconomic Risk," American Economic Review, American Economic Association, vol. 97(2), pages 1-30, May.
  2. Lars Peter Hansen, 2007. "Beliefs, Doubts and Learning: Valuing Economic Risk," NBER Working Papers 12948, National Bureau of Economic Research, Inc.
  3. 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.
  4. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05.
  5. Benjamin Born & Alexandra Peter & Johannes Pfeifer, 2011. "Fiscal News and Macroeconomic Volatility," Bonn Econ Discussion Papers bgse08_2011, University of Bonn, Germany.
  6. Elliott, Graham & Timmermann, Allan G, 2007. "Economic Forecasting," CEPR Discussion Papers 6158, C.E.P.R. Discussion Papers.
  7. Susanto Basu & Brent Bundick, 2011. "Uncertainty Shocks in a Model of Effective Demand," Boston College Working Papers in Economics 774, Boston College Department of Economics, revised 20 Sep 2012.
  8. Ruediger Bachmann & Steffen Elstner & Eric R. Sims, 2010. "Uncertainty and Economic Activity: Evidence from Business Survey Data," NBER Working Papers 16143, National Bureau of Economic Research, Inc.
  9. Kristoffer P. Nimark, 2014. "Man-Bites-Dog Business Cycles," American Economic Review, American Economic Association, vol. 104(8), pages 2320-67, August.
  10. R?diger Bachmann & Christian Bayer, 2014. "Investment Dispersion and the Business Cycle," American Economic Review, American Economic Association, vol. 104(4), pages 1392-1416, April.
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