Published online by Cambridge University Press: 06 May 2018
This paper investigates the macroeconomic impact of uncertainty by using three recently constructed US economic uncertainty proxies. Emphasis is placed on examining the informational value of these indicators and their ability to better predict economic activity. We focus on the direct and/or indirect transmission chains of economic uncertainty on US macroeconomic aggregates, the magnitude of the forecast improvement induced by economic uncertainty and the strength of the observed dynamic relations. Our results show that macroeconomic uncertainty can help in forecasting key macroeconomic aggregates across multiple horizons, and this predictive power is economically and statistically significant. The two macroeconomic uncertainty measures anticipate industrial production and consumption directly, and investment and employment indirectly, with a time-delay. The transmission chains for investment include consumption and the stock market as intermediate variables, and for employment consumption and investment. No substantial evidence of feedback effects from real activity to macroeconomic uncertainty is found. Moreover, asymmetry in macroeconomic uncertainty is found to be important. Upside and downside uncertainty produce significant macroeconomic effects, yet downside uncertainty produces the strongest impact. Results from a “news-based” economic policy uncertainty measure are weaker.
We are grateful to the Associate Editor and two anonymous referees for their valuable comments and suggestions. We are also thankful to the Editor William A. Barnett. We further thank the participants of the 2015 Annual Conference of the International Association for Applied Econometrics (IAAE 2015) for useful discussions. Paraskevi Salamaliki gratefully acknowledges the financial support from the European Union's Seventh Framework Programme (FP7) Marie Curie Zukunftskolleg Incoming Fellowship Programme, University of Konstanz, Grant no. 291784 (a large part of this project was conducted while the author was a Marie Curie Postdoctoral Researcher at the Department of Economics and the Zukunftskolleg Research Institute of the University of Konstanz, Germany). Any remaining errors are the authors' responsibility.