Working Paper: NBER ID: w23796
Authors: David Berger; Ian Dewbecker; Stefano Giglio
Abstract: We provide evidence on the relationship between aggregate uncertainty and the macroeconomy. Identifying uncertainty shocks using methods from the news shocks literature, the analysis finds that innovations in realized stock market volatility are robustly followed by contractions, while shocks to forward-looking uncertainty have no significant effect on the economy. Moreover, investors have historically paid large premia to hedge shocks to realized but not implied volatility. A model in which fundamental shocks are skewed left can match those facts. Aggregate volatility matters, but it is the realization of volatility, rather than uncertainty about the future, that has been associated with declines.
Keywords: Uncertainty; Volatility; Macroeconomics; News Shocks
JEL Codes: E00; E32; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased realized volatility (G17) | decline in output (E23) |
| increased realized volatility (G17) | decline in consumption (D12) |
| increased realized volatility (G17) | decline in investment (E22) |
| increased realized volatility (G17) | decline in employment (J63) |
| uncertainty shocks (D89) | no significant effects on the real economy (F69) |