Dynamic Impacts of Uncertainty Shocks

This paper assesses whether the impact of uncertainty on the U.S. economy has changed over time. Estimating a Time-Varying Parameter Vector Autoregressive model on U.S. data from 1985Q1 to 2021Q2, we find that uncertainty shocks have larger negative effects on output during the Covid-19 recession than during other periods. However, financial market variables, such as stock price and dividend, respond more significantly to uncertainty shocks during the Great Recession and the IT bubble of the 2000s. We then develop a Dynamic Stochastic General Equilibrium model with monetary policy uncertainty. Based on the calibrated model, we conduct several counterfactual exercises to demonstrate that the effects of uncertainty shocks depend on the state of the economy, which is consistent with the empirical evidence. These findings provide new insights into the time-varying nature of the impact of economic uncertainty