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On the Identification of Financial and Uncertainty Shocks

Author

Listed:
  • Simon Gilchrist

    (Boston University)

  • Egon Zakrajsek

    (Federal Reserve Board)

  • Cristina Fuentes Albero

    (Rutgers University)

  • Dario Caldara

    (Federal Reserve Board of Governors)

Abstract

There is a consensus about the increasing exposure to disruptions in the financial system and economic uncertainty over the recent years. Despite their different implications for policy, discriminating empirically between these two sources of economic fluctuations is not an easy task because their available empirical proxies are strongly correlated. We aim at making progress in discriminating financial and uncertainty shocks by means of an atheoretical approach to identification following the penalty function proposed by Uhlig (2003). We conclude that while the uncertainty channel plays a negligible role in the transmission of financial shocks; the financial channel is key in the transmission of uncertainty shocks. Financial shocks generate slowly-building and economically significant recessions followed by slow recoveries. Uncertainty shocks generate similar adverse effects if transmitted through the financial channel; otherwise, they have significantly smaller effects in economic activity.

Suggested Citation

  • Simon Gilchrist & Egon Zakrajsek & Cristina Fuentes Albero & Dario Caldara, 2013. "On the Identification of Financial and Uncertainty Shocks," 2013 Meeting Papers 965, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:965
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    Cited by:

    1. Robert Ulbricht & Ludwig Straub, 2015. "Endogenous Uncertainty and Credit Crunches," 2015 Meeting Papers 199, Society for Economic Dynamics.
    2. Alessandri, Piergiorgio & Mumtaz, Haroon, 2019. "Financial regimes and uncertainty shocks," Journal of Monetary Economics, Elsevier, vol. 101(C), pages 31-46.
    3. Peersman, G. & Wagner, W.B., 2014. "Shocks to Bank Lending, Risk-Taking, Securitization, and Their Role for U.S. Business Cycle Fluctuations," Discussion Paper 2014-019, Tilburg University, Center for Economic Research.
    4. repec:spr:empeco:v:53:y:2017:i:2:d:10.1007_s00181-016-1141-1 is not listed on IDEAS
    5. Scotti, Chiara, 2016. "Surprise and uncertainty indexes: Real-time aggregation of real-activity macro-surprises," Journal of Monetary Economics, Elsevier, vol. 82(C), pages 1-19.
    6. repec:bla:sajeco:v:86:y:2018:i:3:p:361-380 is not listed on IDEAS

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