The Impact of Uncertainty and Certainty Shocks

50 Pages Posted: 27 Jun 2019 Last revised: 10 Dec 2019

Date Written: December 10, 2019

Abstract

I propose a Bayesian quantile VAR to identify and assess the impact of uncertainty and certainty shocks, unifying Bloom's (2009) two identification steps into one. I find that an uncertainty shock widens the conditional distribution of future real economic activity growth, in line with a risk shock. Conversely, a certainty shock (a shock strongly decreasing uncertainty) narrows the conditional distribution of future real activity growth. In addition to the difference in signs, I show that the two shocks are different shocks. Each shock impacts the real economy uniquely. I support this with the underlying events: For instance, uncertainty shocks relate to events such as Black Monday and 9/11, but also to fears about future negative economic outcomes. In contrast, certainty shocks often link to phases of irrational exuberance. Commonly, no distinction is made between uncertainty and certainty shocks. I show that uncertainty shocks become more important if distinguished from certainty shocks.

Keywords: Bayesian quantile VAR, uncertainty shocks, tail risks, irrational exuberance

JEL Classification: C32, E44, G01

Suggested Citation

Schüler, Yves Stephan, The Impact of Uncertainty and Certainty Shocks (December 10, 2019). Available at SSRN: https://ssrn.com/abstract=3409697 or http://dx.doi.org/10.2139/ssrn.3409697

Yves Stephan Schüler (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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