Empirical evidence on the dynamics of investment under uncertainty in the U.S.
Date
2021
Authors
Haque, Q.
Magnusson, L.M.
Kazuki, T.
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Journal article
Citation
Oxford Bulletin of Economics and Statistics, 2021; 83(5):1193-1217
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Qazi Haque, Leandro M. Magnusson, Kazuki Tomioka
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Abstract
We study the time-varying effects of financial uncertainty shocks in the United States using a vector autoregression with drifting parameters and stochastic volatilities. We find negative effects of financial uncertainty shocks on real activity with both consumption and investment growth declining significantly and comoving along the entire sample. These effects remained fairly stable in the post-WWII period but the negative response of investment growth became more pronounced during the Zero Lower Bound episode. Our findings lend empirical support to theoretical frameworks that can successfully capture this macroeconomic comovement following an uncertainty shock. Remarkably, we find a limited role for financial uncertainty shocks during the Great Recession.
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First published: 05 February 2021
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© 2021 The Department of Economics, University of Oxford and John Wiley & Sons Ltd