DP15881 Downside and Upside Uncertainty Shocks

Author(s): Mario Forni, Luca Gambetti, Luca Sala
Publication Date: March 2021
Keyword(s): Quantile regression, Skewness, uncertainty, 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=15881

An increase in uncertainty is not contractionary per se. What generates a significant downturn of economic activity is a widening of the left tail of the expected distribution of growth, the downside uncertainty. On the contrary, an increase of the right tail, the upside uncertainty, is mildly expansionary. The reason for why uncertainty shocks have been previously found to be contractionary is because movements in downside uncertainty dominate existing empirical measures of uncertainty. The results are obtained using a new econometric approach which combines quantile regressions and structural VARs.