Title: The nonlinear effects of uncertainty shocks
Authors: Laura Jackson Young - Bentley University (United States) [presenting]
Michael Owyang - Federal Reserve Bank of St Louis (United States)
Kevin Kliesen - Federal Reserve Bank of St Louis (United States)
Abstract: It is widely believed that a rise in uncertainty can have detrimental effects on macro, micro, and financial market outcomes, as well as effects on monetary, fiscal, and regulatory policy. The majority of the evidence on the effect of uncertainty shocks on key economic variables has been produced in a linear environment. These models do not account for the fact that the level of uncertainty can affect how shocks propagate. We develop a time-varying threshold VAR in which shocks that lower uncertainty have limited linear effects but shocks that raise uncertainty above the threshold can have amplified effects. Under these circumstances, we find that uncertainty shocks have effects around three times the magnitude as those found in alternative linear models.