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Measuring Uncertainty and Its Impact on the Economy


We propose a new model for measuring uncertainty and its effects on the economy, based on a large vector autoregression with stochastic volatility driven by common factors representing macroeconomic and financial uncertainty. The uncertainty measures reflect changes in both the conditional mean and volatility of the variables, and their impact on the economy can be assessed within the same framework. Estimates with U.S. data show substantial commonality in uncertainty, with sizable effects of uncertainty on key macroeconomic and financial variables. However, historical decompositions show a limited role of uncertainty shocks in macroeconomic fluctuations.

JEL codes: E32, E44, C11, C55.
Keywords: Bayesian VARs, stochastic volatility, large datasets.


Suggested citation: Carriero, Andrea, Todd E. Clark, and Massimiliano Marcellino, 2017. “Measuring Uncertainty and Its Impact on the Economy,” Federal Reserve Bank of Cleveland Working Paper, no. 16-22R. https://doi.org/10.26509/frbc-wp-201622r.

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