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Uncertainty Shocks and the Role of the Black Swan

Listed author(s):
  • Laura Veldkamp

    (NYU Stern)

  • Anna Orlik

    (Federal Reserve Board of Governors)

A recent literature explores many ways in which uncertainty shocks can have important economic effects. But how large are uncertainty shocks and where do they come from? Researchers typically estimate a model with stochastic volatility, using all available data, then condition on the estimated model to infer volatility. This volatility is the uncertainty of an agent who knows the true probability of outcomes and whose only uncertainty is about what the draw from that distribution will be. We model a Bayesian forecaster who uses new data released each quarter to re-estimate the parameters that govern the shape of the probability distribution of GDP growth. Although the forecaster's parameter revisions are small, the probability of black swans (extreme events) is very sensitive to these revisions. Our real-time measure of GDP forecast uncertainty reveals that changes in the risk of a black swan explain most of the shocks to uncertainty.

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File URL: https://economicdynamics.org/meetpapers/2014/paper_275.pdf
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Paper provided by Society for Economic Dynamics in its series 2014 Meeting Papers with number 275.

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Date of creation: 2014
Handle: RePEc:red:sed014:275
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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  1. Timothy Cogley & Thomas J. Sargent, 2005. "The conquest of US inflation: Learning and robustness to model uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 528-563, April.
  2. 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 01 Nov 2015.
  3. Emi Nakamura & Dmitriy Sergeyev & Jón Steinsson, 2017. "Growth-Rate and Uncertainty Shocks in Consumption: Cross-Country Evidence," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(1), pages 1-39, January.
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