Macroeconomic Effect of Uncertainty and Financial Shocks: a non-Gaussian VAR approach

Abstract

The Great Recession highlighted the role of financial and uncertainty shocks as drivers of business cycle fluctuations. However, the fact that uncertainty shocks may affect economic activity by tightening financial conditions makes empirically distinguishing these shocks difficult. This paper examines the macroeconomic effects of the financial and uncertainty shocks in the United States in an SVAR model that exploits the non-normalities of the time series to identify the uncertainty and the financial shock. The results show that macroeconomic uncertainty and financial shocks seem to affect business cycles independently as well as through dynamic interaction. Uncertainty shocks appear to tighten financial conditions, whereas there appears to be no causal relationship between financial conditions and uncertainty. Moreover, the results suggest that uncertainty shocks may have persistent effects on output and investment that last beyond the business cycle.