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Measuring Uncertainty and Its Impact on the Economy

Andrea Carriero1; Todd E. Clark2; Massimiliano Marcellino3

1 Queen Mary University of London · 2 Federal Reserve Bank of Cleveland · 3 Bocconi University, IGIER and CEPR

The Review of Economics and Statistics 2018 open access

We propose a new model for measuring uncertainty and its effects on the economy, based on a large vector autoregression with stochastic volatility driven by common factors representing macroeconomic and financial uncertainty. The uncertainty measures reflect changes in both the conditional mean and volatility of the variables, and their impact on the economy can be assessed within the same framework. Estimates with U.S. data show substantial commonality in uncertainty, with sizable effects of uncertainty on key macroeconomic and financial variables. However, historical decompositions show a limited role of uncertainty shocks in macroeconomic fluctuations.

DOI
10.1162/rest_a_00693
Volume
100 (5)
Pages
799-815
Language
en
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