Uncertainty and Business Cycles: Exogenous Impulse or Endogenous Response?

Uncertainty about the future rises in recessions. But is uncertainty a source of business cycles or an endogenous response to them, and does the type of uncertainty matter? We propose a novel SVAR identification strategy to address these questions via inequality constraints on the structural shocks....

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Bibliographic Details
Published in:American economic journal. Macroeconomics 2021-10, Vol.13 (4), p.369-410
Main Authors: Ludvigson, Sydney C., Ma, Sai, Ng, Serena
Format: Article
Language:English
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Summary:Uncertainty about the future rises in recessions. But is uncertainty a source of business cycles or an endogenous response to them, and does the type of uncertainty matter? We propose a novel SVAR identification strategy to address these questions via inequality constraints on the structural shocks. We find that sharply higher macroeconomic uncertainty in recessions is often an endogenous response to output shocks, while uncertainty about financial markets is a likely source of output fluctuations.
ISSN:1945-7707
1945-7715
DOI:10.1257/mac.20190171