What has been the effect of uncertainty shocks in the U.S. economy over the last century? What are the roles of the financial channel and monetary policy channel in propagating uncertainty shocks? Our empirical strategies enable us to distinguish between the effects of uncertainty shocks on key macroeconomic and financial variables transmitted through each channel. A hundred years of data further allow us to answer these questions from a novel historical perspective. This paper finds robust evidence that financial conditions captured by both borrowing costs and the availability of credit have played a crucial role in propagating uncertainty shocks over the last century. However, heightened uncertainty does not necessarily amplify the adverse effect of financial shocks, suggesting an asymmetric interaction between uncertainty and financial shocks. Interestingly, the monetary policy stance seems to play only a minor role in propagating uncertainty shocks, which is in sharp contrast to the recent claim that binding zero-lower-bound amplifies the negative effect of uncertainty shocks. We argue that the contribution of constrained monetary policy to amplifying uncertainty shocks is largely masked by the joint concurrence of binding zero-lower-bound and tightened financial conditions.
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Comments from the editor and an anonymous referee greatly improved the paper. We are also thankful to our discussants Nauro Campos and Fang Qiao, as well as Martin Bijserbosch, Davide Furceri, Paul Luk, Hyeongwoo Kim, Kwangyong Park, Giovanni Pellegrino, Wooheon Rhee, Xuguang (Simon) Sheng, Myungkyu Shim, Sergio Sola, Kenneth West, and the seminar participants at the INFINITI Conference on International Finance 2018 ASIA-PACIFIC in Sydney, Korea’s Allied Economic Associations Annual Meeting in Seoul, Korea Money and Finance Association Annual International Conference in Busan, Korea-Japan Joint Economics Seminar at Korea University, and 20th Hokkaido-Yonsei Joint Seminar. Any errors are the sole responsibility of the authors. This work was supported (in part) by the Yonsei University Future-leading Research Initiative of 2019 (2019-22-0218).
© 2021 Walter de Gruyter GmbH, Berlin/Boston 2021.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics