The paper studies the influence of uncertainty on the performance of the US economy between 1992 and 2019. In order to isolate the effects of uncertainty from those of other economic factors, the authors exploit daily observations on the price and expected volatility of the shares included in the S&P 500 stock price index. Changes in the expected volatility of the market that occur independently from the variations in the underlying S&P 500 price index are interpreted as uncertainty shocks. The authors employ monthly averages of the daily shocks to examine the relation between investor uncertainty and a range of macroeconomic indicators.
The analysis confirms that uncertainty is an important driver of macroeconomic dynamics. In the US, uncertainty shocks are often associated with geopolitical events, such as the 9/11 attacks or the political tensions with North Korea in August 2017; they are generally followed by a significant drop in employment, real wages and industrial production, as well as a slight decline in consumer prices. Over the sample period, uncertainty explains overall approximately 20% of the observed volatility in employment and industrial production.
