We formalize the idea that uncertainty is generated by news about future developments in economic conditions which are not perfectly predictable. Using a simple model of limited information, we show that uncertainty shocks can be obtained as the square of news shocks. We develop a two-step econometric procedure to estimate the effects of news and we find highly non-linear effects. Large news shocks increase uncertainty. This mitigates the effects of good news and amplies the effects of bad news in the short run. The Volcker recession and the Great Recession were exacerbated by the uncertainty effects of news.
News, Uncertainty and Economic Fluctuations (No News Is Good News) / Forni, Mario; Gambetti, Luca; Sala, Luca. - In: CENTRE FOR ECONOMIC POLICY RESEARCH DISCUSSION PAPERS. - ISSN 1442-8636. - (2017), pp. 1-41.
News, Uncertainty and Economic Fluctuations (No News Is Good News)
Mario Forni;Luca Gambetti;
2017-01-01
Abstract
We formalize the idea that uncertainty is generated by news about future developments in economic conditions which are not perfectly predictable. Using a simple model of limited information, we show that uncertainty shocks can be obtained as the square of news shocks. We develop a two-step econometric procedure to estimate the effects of news and we find highly non-linear effects. Large news shocks increase uncertainty. This mitigates the effects of good news and amplies the effects of bad news in the short run. The Volcker recession and the Great Recession were exacerbated by the uncertainty effects of news.
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