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Estimating the effects of uncertainty over the business cycle

Bonciani, Dario (2015): Estimating the effects of uncertainty over the business cycle.

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Abstract

In this paper I provide empirical evidence that uncertainty shocks have strong asymmetric effects on economic activity depending on the phase of the business cycle. In particular, the impulse responses estimated with the local projection method on a smooth-transition model show that in recessions uncertainty shocks strongly dampen industrial production, increase unemployment and reduce prices. In an expansion the effects are reversed, and uncertainty shocks appear to have positive macroeconomic effects. One possible explanation is that during expansions uncertainty fosters investments and economic activity through the "growth options" channel, while in recessions it reduces investments via the "wait-and-see" channel.

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