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Federal Reserve Bank of St. Louis
Working Papers
The Nonlinear Effects of Uncertainty Shocks
Laura E. Jackson
Kevin L. Kliesen
Michael T. Owyang

We consider the effects of uncertainty shocks in a nonlinear VAR that allows uncertainty to have amplification effects. When uncertainty is relatively low, fluctuations in uncertainty have small, linear effects. In periods of high uncertainty, the effect of a further increase in uncertainty is magnified. We find that uncertainty shocks in this environment have a more pronounced effect on real economic variables. We also conduct counterfactual experiments to determine the channels through which uncertainty acts. Uncertainty propagates through both the household consumption channel and through businesses delaying investment, providing substantial contributions to the decline in GDP observed after uncertainty shocks. Finally, we find evidence of the ability of systematic monetary policy to mitigate the adverse effects of uncertainty shocks.

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Laura E. Jackson & Kevin L. Kliesen & Michael T. Owyang, The Nonlinear Effects of Uncertainty Shocks, Federal Reserve Bank of St. Louis, Working Papers 2018-35, 16 Nov 2018.
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Keywords: uncertainty; time-varying threshold VAR; monetary policy; generalized impulse response functions
DOI: doi.org/10.20955/wp.2018.035
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