Understanding the Sources of Macroeconomic Uncertainty

Abstract

We propose a decomposition to distinguish between Knightian uncertainty (ambiguity) and risk, where the …rst measures the uncertainty about the probability distribution generating the data, while the second measures uncertainty about the odds of the outcomes when the probability distribution is known. We use the Survey of Professional Forecasters (SPF) density forecasts to quantify overall uncertainty as well as the evolution of the di¤erent components of uncertainty over time and investigate their importance for macroeconomic ‡uctuations. We also study the behavior and evolution of the various components of our decomposition in a model that features ambiguity and risk.

Uncertainty across volatility regimes

“…Other measures of macro uncertainty available in the literature have been proposed byRossi, Sekhposyan, and Soupre (2016) andScotti (2016). We use the measure proposed byJurado et al (2015) to be consistent with the VAR specification inLudvigson et al (2018a); see below.…”

Assessing International Commonality in Macroeconomic Uncertainty and Its Effects

“…Jurado, Ludvigson, and Ng (2015) argue for defining and measuring uncertainty with forecast error variances. Rossi, Sekhposyan, and Soupre (2018) provide additional discussion of alternative concepts and measures, including a distinction between ex post and ex ante discussion.…”

News and Uncertainty Shocks

“…We employ the same reduced-form VAR to identify news and uncertainty shocks. However, we compute the matrices required for identification of these shocks separately as if we were only interested in either news (Barsky and Sims, 2011) or uncertainty shocks (Rossi et al, 2016).…”

“…Uncertainty shocks are an alternative source of belief-driven business cycle fluctuations (Bloom, 2009). The empirical evidence on the short-run negative effects of uncertainty shocks on economic activity using vector autoregressive models is extensive (Bachmann, Elstner, and Sims, 2013;Jurado, Ludvigson, and Ng, 2015;Baker, Bloom, and Davis, 2016;Caldara, Fuentes-Albero, Gilchrist, and Zakrajšek, 2016;Rossi, Sekhposyan, and Soupre, 2016;Shin and Zhong, 2018).…”