Title: Uncertainty across volatility regimes
Authors: Luca Fanelli - University of Bologna (Italy) [presenting]
Giovanni Angelini - University of Bologna (Italy)
Emanuele Bacchiocchi - University of Milan (Italy)
Abstract: The aim is to employ a small-scale non-recursive structural vector autoregression (SVAR) and a new identification methodology to address empirically two questions by using post-WW2U.S. data: (i) does the relationship between macroeconomic and financial uncertainty and economic activity change across main macroeconomic regimes? (ii) Is macroeconomic and/or financial uncertainty a major cause or effect (or both) of decline in economic activity? Our non-recursive SVAR is identified by exploiting the breaks in the (unconditional) volatility that characterize macroeconomic variables across business cycle and generates regime-dependent impulse response functions. To address (ii), the specified system features a number of moment conditions induced by heteroscedasticity which permit modeling `reverse causality', i.e. uncertainty shocks can cause a decline in real economic activity and, simultaneously, heightened uncertainty can represent a contemporaneous response to real economic activity shocks. Empirical results based on monthly data on the period 1960-2015 suggest a positive answer to (i) and a more involved answer to (ii). Our evidence also suggests that during the zero lower bound on the federal fund rate, the implementation of unconventional policies by the Fed possibly contributed to attenuate the mechanisms behind the rise of endogenous volatility/uncertainty.