Abstract:
My dissertation looks at the new and growing field of macroeconomic uncertainty. It consists of three empirical essays on different measures of macroeconomic uncertainty and how uncertainty affects macroeconomic behavior. The first essay uses a new uncertainty index from Baker et al. (2012). We evaluate the time-varying correlation between macroeconomic uncertainty, inflation, and output. Estimation results from a multivariate DCC-GARCH model reveal that the sign of the correlation between macroeconomic uncertainty and inflation changed from negative to positive during the late 1990s, whereas the correlation between uncertainty and output is consistently negative. In the second essay, we propose domestic uncertainty shocks may serve as a channel through which business cycles are transmitted internationally. To quantify uncertainty, we use two measures from the current literature and estimate structural vector autoregressions to evaluate the effects U.S. uncertainty shocks have on the Japanese and British economies. Our results suggest U.S. uncertainty shocks have international effects consistent with a demand shock in the context of an open-economy IS/LM model with sticky prices. For the final essay we estimate a number of macroeconomic variables as logistic smooth transition autoregressive (LSTAR) processes with uncertainty as the transition variable. Nonlinear estimation allows us to answer several interesting questions left unanswered by a linear model. For a number of important macroeconomic variables, we show (i) a positive shock to uncertainty has a greater effect than a negative shock, and (ii) the effect of the uncertainty shock is highly dependent on the state of the economy. Hence, the usual linear estimates concerning the consequences of uncertainty are underestimated in circumstances such as the recent financial crisis.
