The impact of uncertainty shocks in the United Kingdom

This paper uses a data-rich environment to produce direct econometric estimates of macroeconomic and financial uncertainty in the United Kingdom for the period 1991–2016. These indices exhibit significant independent variation from popular proxies for macroeconomic and financial uncertainty. We identify the impact of uncertainty shocks using narrative sign restrictions, which allow us to exploit individual historic events to separate the impact of macroeconomic, financial and credit shocks on real variables. Using only traditional sign restrictions, we find that the real effects of macroeconomic uncertainty shocks are generally weaker than proxies suggest and that the effects depend on a subsequent rise in financial uncertainty and credit spreads to have a negative impact on GDP. Exploiting narrative events such as the disorderly exit from the Exchange Rate Mechanism, the dot-com recession and the financial crisis support this finding. However, conditioning on narrative events more closely associated with political uncertainty, ie tight general elections, suggests a stronger impact response of GDP to macro uncertainty shocks. We find these results are robust to controlling for both financial and global uncertainty.