DP15692 Macroeconomic Uncertainty and Vector Autoregressions

Author(s): Mario Forni, Luca Gambetti, Luca Sala
Publication Date: January 2021
Date Revised: January 2021
Keyword(s): OLS estimation, stochastic volatility, Uncertainty shocks, VAR models
JEL(s): C32, E32
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15692

We estimate measures of macroeconomic uncertainty and compute the effects of uncertainty shocks by means of a new simple procedure based on standard VARs. Uncertainty and its effects are estimated using a single model so to ensure internal consistency. Under suitable assumptions, our procedure is equivalent to using the square of the VAR forecast error as an external instrument in a proxy SVAR. Our procedure allows to add orthogonality constraints to the standard proxy SVAR identification scheme. We apply our method to a US data set; we find that uncertainty is mainly exogenous and is responsible of a large fraction of business-cycle fluctuations.