Working Paper: NBER ID: w21803
Authors: Sydney C. Ludvigson; Sai Ma; Serena Ng
Abstract: Uncertainty about the future rises in recessions. But is uncertainty a source of business cycles or an endogenous response to them, and does the type of uncertainty matter? We propose a novel SVAR identification strategy to address these questions via inequality constraints on the structural shocks. We find that sharply higher macroeconomic uncertainty in recessions is often an endogenous response to output shocks, while uncertainty about financial markets is a likely source of output fluctuations. But the findings also suggest that macroeconomic uncertainty plays an important role in recessions, by substantially amplifying downturns caused by other shocks.
Keywords: Uncertainty; Business Cycles; Financial Markets; Macroeconomic Shocks
JEL Codes: E00; E32; E44; G01; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial uncertainty (D89) | Real activity (E39) |
| Negative economic activity shocks (E39) | Macroeconomic uncertainty (D89) |
| Negative economic activity shocks (E39) | Policy uncertainty (D89) |
| Macroeconomic uncertainty (D89) | Amplification of contractionary effects of adverse shocks (E44) |