Variability in the effects of uncertainty shocks: New stylized facts from OECD countries

Research output: Contribution to journalArticle

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Abstract

This study examines variability in the effects of uncertainty shocks using a panel of international data. It first evaluates variability in the effects of uncertainty shocks by applying rolling sample and time-varying parameter Vector Autoregression models to US data covering the past 70 years. The results reveal that the effects of uncertainty shocks on the US economy have changed substantially over time. First, the negative effect of uncertainty shocks on the output decreased until the recent period, in which monetary policy rules are constrained by the zero lower bound. Second, contrary to the negative aggregate demand interpretation in the recent literature, uncertainty shocks acted as a negative aggregate supply shock in the earlier periods. From the past 50 years’ data for 12 small open economies, I find that the negative effect of uncertainty shocks on output has increased, contrary to the US case. Additionally, the exchange rate and inflation responses are heterogeneous across countries, and the country's commodity exporter or safe haven status is critical in determining the sign of these responses. Finally, the increased vulnerability of small open economies to uncertainty shocks is associated with an increase in international trade.

Original languageEnglish
Pages (from-to)1339-1351
Number of pages13
JournalJournal of Macroeconomics
Volume53
DOIs
Publication statusPublished - 2017 Sep

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Uncertainty
OECD countries
Stylized facts
Small open economy
Safe haven
Monetary policy rules
US economy
Supply shocks
International trade
Exporters
Aggregate demand
Commodities
Vector autoregression model
Exchange rates
Inflation
Aggregate supply
Time-varying parameters
Zero lower bound
Vulnerability

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Cite this

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abstract = "This study examines variability in the effects of uncertainty shocks using a panel of international data. It first evaluates variability in the effects of uncertainty shocks by applying rolling sample and time-varying parameter Vector Autoregression models to US data covering the past 70 years. The results reveal that the effects of uncertainty shocks on the US economy have changed substantially over time. First, the negative effect of uncertainty shocks on the output decreased until the recent period, in which monetary policy rules are constrained by the zero lower bound. Second, contrary to the negative aggregate demand interpretation in the recent literature, uncertainty shocks acted as a negative aggregate supply shock in the earlier periods. From the past 50 years’ data for 12 small open economies, I find that the negative effect of uncertainty shocks on output has increased, contrary to the US case. Additionally, the exchange rate and inflation responses are heterogeneous across countries, and the country's commodity exporter or safe haven status is critical in determining the sign of these responses. Finally, the increased vulnerability of small open economies to uncertainty shocks is associated with an increase in international trade.",
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Variability in the effects of uncertainty shocks : New stylized facts from OECD countries. / Choi, Sangyup.

In: Journal of Macroeconomics, Vol. 53, 09.2017, p. 1339-1351.

Research output: Contribution to journalArticle

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