Working Paper: CEPR ID: DP15692
Authors: Mario Forni; Luca Gambetti; Luca Sala
Abstract: We estimate measures of macroeconomic uncertainty and compute the effects of uncertainty shocks by means of a new simple procedure based on standard VARs. Uncertainty and its effects are estimated using a single model so to ensure internal consistency. Under suitable assumptions, our procedure is equivalent to using the square of the VAR forecast error as an external instrument in a proxy SVAR. Our procedure allows to add orthogonality constraints to the standard proxy SVAR identification scheme. We apply our method to a US data set; we find that uncertainty is mainly exogenous and is responsible of a large fraction of business-cycle fluctuations.
Keywords: uncertainty shocks; VAR models; OLS estimation; stochastic volatility
JEL Codes: C32; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Uncertainty shocks (D89) | Output (Y10) |
| Uncertainty shocks (D89) | Unemployment (J64) |
| VAR model variables (C32) | Uncertainty estimates (C13) |
| Uncertainty estimates (C13) | Economic conditions (E66) |