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What is the impact of time-varying business uncertainty on economic activity? Using partly confidential business survey data from the U.S. and Germany in structural VARs, we find that positive innovations to business uncertainty lead to prolonged declines in economic activity. In contrast, their high-frequency impact is small. We find no evidence of the "wait-and-see"-effect -large declines of economic activity on impact and subsequent fast rebounds -that the recent literature associates with positive uncertainty shocks. Rather, positive innovations to business uncertainty have effects similar to negative business confidence innovations. Once we control for their low-frequency effect, we find little statistically or economically significant impact of uncertainty innovations on activity. We argue that high uncertainty events are a mere epiphenomenon of bad economic times: recessions breed uncertainty.

In the popular press and much of the business community, it continues to be an article of faith that "consumer confidence" has an important role-both prognostic and causal-in macroeconomics. On the other hand, the stance of the rather limited academic literature on confidence is far more ambiguous. The judgments range from the conclusion that confidence measures have an important role both in prediction and in understanding the causes of business cycles, to the view that they contain important information but have little causal role, to the verdict that they have no value even in forecasting.There are, broadly speaking, two contrasting approaches to the role of confidence in macroeconomics. The first, which we will refer to as the "animal spirits" view, posits autonomous fluctuations in beliefs that in turn have causal effects on economic activity. In the proceedings of a symposium on the causes of the 1990 -1991 recession, both Hall (1993 and Blanchard (1993) regard exogenous movements in consumption as a cause of business cycles. Indeed, Blanchard proposes that the cause of the recession was a powerful, long-lasting negative consumption shock associated with an exogenous shift in pessimism that had a causal effect on overall aggregate demand. While not fully pursuing the idea in his brief paper, Innovations to consumer confidence convey incremental information about economic activity far into the future. Does this reflect a causal effect of animal spirits on economic activity, or news about exogenous future productivity received by consumers? Using indirect inference, we study the impulse responses to confidence innovations in conjunction with an appropriately augmented New Keynesian model. While news, animal spirits, and pure noise all contribute to confidence innovations, the relationship between confidence and subsequent activity is almost entirely reflective of the news component. Confidence innovations are well characterized as noisy measures of changes in expected productivity growth over a relatively long horizon. (JEL D12, D83, D84, E12) ). We are particularly grateful to two anonymous referees for suggestions that have substantially improved the paper. We also acknowledge the comments of

What is the impact of time-varying uncertainty on aggregate economic activity? Using business survey data from the U.S. and Germany in structural vector autoregressions, we find that positive innovations to business uncertainty lead robustly to very prolonged declines in economic activity. In contrast, their high frequency impact is small. We thus find no evidence of the high-frequency wait-and-see effect -large declines of economic activity on impact and fast rebounds -that the recent literature associates with positive innovations to uncertainty. Rather, positive innovations to business uncertainty have similar effects as negative innovations to business confidence. Once we control for its low frequency impact, we find no statistically or economically significant effect of uncertainty innovations on aggregate activity.JEL Codes: E30, E32, E37.