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Studies in Nonlinear Dynamics & Econometrics

Ed. by Mizrach, Bruce


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Volume 24 (2020)

The nonlinear effects of uncertainty shocks

Laura E. JacksonORCID iD: https://orcid.org/0000-0002-3601-3087 / Kevin L. Kliesen / Michael T. Owyang
Published Online: 2019-10-26 | DOI: https://doi.org/10.1515/snde-2019-0024

Abstract

We consider the effects of uncertainty shocks in a nonlinear VAR that allows uncertainty to have amplification effects. When uncertainty is relatively low, fluctuations in uncertainty have small, linear effects. In periods of high uncertainty, the effect of a further increase in uncertainty is magnified. We find that uncertainty shocks in this environment have a more pronounced effect on real economic variables. We also conduct counterfactual experiments to determine the channels through which uncertainty acts. Uncertainty propagates through both the household consumption channel and through businesses delaying investment, providing substantial contributions to the decline in GDP observed after uncertainty shocks. Finally, we find evidence of the ability of systematic monetary policy to mitigate the adverse effects of uncertainty shocks.

Keywords: generalized impulse response functions; monetary policy; time-varying threshold VAR; uncertainty

JEL Classification: C34; E2; E32

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About the article

Published Online: 2019-10-26


Citation Information: Studies in Nonlinear Dynamics & Econometrics, 20190024, ISSN (Online) 1558-3708, DOI: https://doi.org/10.1515/snde-2019-0024.

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