News and Uncertainty Shocks

Abstract

We provide novel evidence that technological news and uncertainty shocks, identified one at a time using vector autoregressive (VAR) models as in the literature, are correlated; that is, they are not truly structural . We then proceed by proposing an identification scheme to disentangle the effects of news and financial uncertainty shocks. We find that by removing financial uncertainty effects from news shocks, the positive responses of economic activity to news shocks are strengthened in the short term; and that the negative responses of activity to financial uncertainty shocks are deepened in the medium term as “good uncertainty” effects on technology are purged.

Uncertainty before and during COVID‐19: A survey

“…A difficult distinction to draw is that between news shocks and uncertainty shocks in VAR investigations, as pointed out by Cascaldi‐Garcia and Galvão ( 2021 ). They document this difficulty by showing that identifying such shocks one at a time—something often done in the literature—leads to obtaining proxies for these shocks that are correlated.…”

The global effects of Covid-19-induced uncertainty

“…As pointed out by Baker et al (2020a), the peak value of financial volatility recorded in March 2020 is the highest in recent history, Great Recession included. This is bad news, because spikes in financial uncertainty have been associated to drops in real activity (see, among others, Bloom (2009), Caggiano et al (2014), Leduc and Liu (2016), (Basu and Bundick, 2017), Caggiano et al (2017), Ludvigson et al (2019), Cascaldi-Garcia andGalvão (2020). Given the globality of the Covid-19-induced uncertainty shock, what does this imply for world output for the months to come?…”

COVID-19-induced shocks and uncertainty

“…the large and systematic increase in the VIX index; hump-shaped recessionary effects; and increased risk factors), are reminiscent of an uncertainty shock as is typically found throughout the empirical and theoretical literature, e.g. Leduc and Liu (2016) , Basu and Bundick (2017) and Cascaldi-Garcia and Galvao (2020) .…”

“… Caldara et al (2016) and Basu and Bundick (2017) , while they are inconsistent with ‘news’-type shocks, e.g. Cascaldi-Garcia and Galvao (2020) . Third, the zero impact responses of the Sentiment Index and various credit market indicators (BAA and TED Spread) to our COVID-19-induced shock lead us to exclude other potential first-order structural interpretations such as ‘expectation’ or ‘financial’ shock.…”