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Session 8: Macroeconomics of Uncertainty and Volatility

August 28-30, 2017
Organized by: 
  • Nick Bloom (Stanford University)
  • Steve Davis (University of Chicago)
  • Jesus Fernandez-Villaverde (University of Pennsylvania)

The session will cover recent work on the causes and effects of changes in volatility and uncertainty in the aggregate economy, which remain topical given the recent Brexit and Trump election outcomes. Many observers, including policymakers such as Bernanke, Summers, and Romer, have highlighted that these have been major driving factors in the recent credit-crunch recession and advanced heuristic arguments of why this might have been the case. Unfortunately, our theoretical and empirical understanding of these topics is limited since only recently have macroeconomists started working on these issues from a more systematic basis. Nevertheless, changes in volatility and uncertainty similar to the ones observed for the U.S. economy can be shown to be quantitatively significant factors in business cycle fluctuations and a key element in a successful explanation of aggregate fluctuations. Moreover, the presence of changes in volatility and uncertainty has important implications for the design of optimal policies and for our assessment of the responses of central banks and fiscal authorities to recent developments in the world economy. Therefore, the session will aim to include about 14 recent papers on these topics. Our goal is to have a balanced mix of theoretical and empirical papers and a strong interest in applications to policy.


In this Session

Aug 28 | 1:00 pm to 1:40 pm

Uncertainty and the Shadow Banking Crisis: Estimates from a Dynamic Model

Presented by: Xu Tian, University of Toronto
Aug 28 | 1:40 pm to 2:20 pm

Bank lending in uncertain times

Presented by: Piergiorgio Alessandri, Bank of Italy
Co-Author(s): Margherita Bottero, Bank of Italy

We exploit loan-level data from the Italian Credit Register to isolate the impact of aggregate uncertainty on the supply of bank credit. Our dataset includes the loan applications submitted by a sample of 650,000 non-financial firms to all Italian banks between 2003 and 2012. The granularity of the data and the occurrence of multiple bank-firm relations allows us to thoroughly control for both bank and firm characteristics. In particular, following Kwaja and Mian (2008) and Jimenéz et al.

Aug 28 | 2:20 pm to 3:00 pm

Shocks vs. Responsiveness: What Drives Countercyclical Dispersion?

Presented by: Joe Vavra, University of Chicago and NBER
Co-Author(s): David Berger, Northwestern University and NBER

The dispersion of many economic variables is countercyclical. What drives this fact? Greater dispersion could arise from greater volatility of shocks or from agents responding more to shocks of constant size. Without data separately measuring exogenous shocks and endogenous responses, a theoretical debate between these explanations has emerged. In this paper, we provide novel identification using the open-economy environment: using confidential BLS microdata, we document a robust positive relationship between exchange rate pass-through and the dispersion of item-level price changes.

Aug 28 | 3:30 pm to 4:10 pm

Forward Guidance, Policy Uncertainty, and the Term Premium

Presented by: Brent Bundick, Federal Reserve Bank of Kansas City
Co-Author(s): Trenton Herriford, Federal Reserve Bank of Kansas City A. Lee Smith, Federal Reserve Bank of Kansas City

We examine the macroeconomic and term premia implications of monetary policy uncertainty shocks. Using options on Eurodollar futures, we employ the VIX methodology to measure implied volatility about future short-term interest rates at various horizons. We identify monetary policy uncertainty shocks using the unexpected changes in this term structure of implied volatility around monetary policy announcements.

Aug 28 | 4:10 pm to 5:00 pm

Policy Uncertainty, Political Capital, and Firm Risk-Taking

Presented by: Pat Akey, University of Toronto
Co-Author(s): Stefan Lewellen, London Business School
We document a new "policy sensitivity" channel of corporate political contributions. Firms that are highly sensitive to government policy uncertainty have a stronger incentive to contribute to political candidates, and these firms' risk-taking and performance should be more affected by the gain or loss of a political connection relative to less-sensitive firms. We verify these patterns in the data using a sample of close U.S. congressional elections. We first show that policy-sensitive firms donate more to candidates for elected office than less-sensitive firms. We then show that plausibly exogenous shocks to policy-sensitive firms' political connections produce larger subsequent changes in these firms' investment, leverage, firm value, operating performance, CDS spreads, and option-implied volatility relative to less-sensitive firms. Our results represent the first attempt in the literature to disentangle the effects of policy sensitivity and political connectedness on firms' risk-taking and performance and suggest that many existing results in the political connections literature are driven by policy-sensitive firms.
Aug 29 | 9:30 am to 10:00 am

Waiting on the Courts: Effects of Policy Uncertainty on Pollution and Investment

Presented by: Jackson Dorsey, University of Arizona

Legal challenges and transitions of political power cause the future of regulatory policies to be uncertain. In this article, I investigate how uncertainty about environmental policy affects investment and emissions at coal-fired power plants. I exploit a legal challenge to the Clean Air Interstate Rule (CAIR) that created variation in the probability that individual plants would need to comply with the new policy. I use a difference-in-differences approach to compare pollution reductions at power plants located in states subject to more uncertainty to plants in states that that were not.

Aug 29 | 10:00 am to 10:30 am

Policy Uncertainty in Japan

Presented by: Steven J. Davis, University of Chicago
Co-Author(s): Elif C. Arbatli, International Monetary Fund, Arata Ito, Research Institute of Economy, Trade and Industry, Naoko Miake, International Monetary Fund, Ikuo Saito, International Monetary Fund
Aug 29 | 10:30 am to 11:00 am

Components of Uncertainty

Presented by: Vegard Høghaug Larsen Norges Bank (Central bank of Norway)

Uncertainty is acknowledged to be a source of economic fluctuations. But, does the type of uncertainty matter for the economy’s response to an uncertainty shock? This paper offers a novel identification strategy to disentangle different types of uncertainty. It uses machine learning techniques to classify different types of news instead of specifying a set of keywords. It is found that, depending on its source, the effects of uncertainty on macroeconomic variable may differ. I find that both good (expansionary effect) and bad (contractionary effect) types of uncertainty exist.

Aug 29 | 11:30 am to 12:00 pm

Firm-Level Political Risk: Measurement and Effects

Presented by: Tarek A. Hassan, University of Chicago
Co-Author(s): Stephan Hollander, Tilburg University, Laurence van Lent, Tilburg University, Ahmed Tahoun, London Business School
Aug 29 | 12:00 pm to 12:30 pm

Uncertainty-Induced Reallocations and Growth

Presented by: Max Croce, University of North Carolina at Chapel Hill
Co-Author(s): Ravi Bansal, Duke University, Wenxi Liao, Duke University, Sam Rosen, University of North Carolina at Chapel Hill
Aug 29 | 1:30 pm to 2:00 pm

Uncertainty and Hyperinflation: European Inflation Dynamics after World War I

Presented by: Kris James Mitchener, Santa Clara University & NBER
Co-Author(s): Jose A. Lopez, Federal Reserve Bank of San Francisco

Fiscal deficits, high debt-to-GDP ratios, and inflation rates suggest hyperinflation could have potentially emerged in many European countries after World War I. We demonstrate that policy uncertainty was instrumental in pushing a subset of European countries into hyperinflation shortly after the end of the war. Germany, Austria, Poland, and Hungary (GAPH) suffered from pronounced levels of uncertainty caused by protracted political negotiations over reparations payments, the apportionment of the Austro-Hungarian debt, and border disputes.

Aug 29 | 2:00 pm to 2:30 pm

Redistribution and Fiscal Uncertainty Shocks

Presented by: Hikaru Saijo, University of California, Santa Cruz

This paper revisits the macroeconomic impact of an uncertainty shock about fiscal policy in a New Keynesian framework. Motivated by the observation that many fiscal policies are redistributive and that many U.S. households do not own capital, I introduce household heterogeneity in the form of limited capital market participation. I show that household heterogeneity significantly magnifies the aggregate effect and restores co-movement of macroeconomic variables in a contraction that is generated by a fiscal uncertainty shock.

Aug 29 | 3:00 pm to 3:30 pm

Global Spillover Effects of US Uncertainty

Presented by: Saroj Bhattarai, University of Texas at Austin
Co-Author(s): Arpita Chatterjee, University of New South Wales, Woong Yong Park, Seoul National University and CAMA
Aug 29 | 3:30 pm to 4:00 pm

The Impact of Uncertainty Shocks in the U.K.

Presented by: Chris Redl, Bank of England

Abstract This paper uses a data rich environment to produce direct econometric estimates of macroeconomic and financial uncertainty in the United Kingdom for the period 1991-2016. These indices exhibit significant independent variation from popular proxies for macroeconomic and financial uncertainty. We identify the impact of uncertainty shocks using narrative sign restrictions which allows us to exploit individual historic events to separate the impact of macroeconomic, financial and credit shocks on real variables.

Aug 29 | 4:00 pm to 4:30 pm

Risk Aversion and the Response of the Macroeconomy to Uncertainty Shocks

Presented by: Andrea Tamoni, LSE
Co-Author(s): Lorenzo Bretscher, LSE Alex Hsu, Georgia Institute of Technology
Aug 30 | 8:30 am to 9:10 am

Embrace or Fear Uncertainty: Growth Options, Limited Risk Sharing, and Asset Prices

Presented by: Winston Dou, The Wharton School

The impact of uncertainty shocks on asset prices and macroeconomic dynamics depends on the degree of risk sharing in the economy and the origin of uncertainty. We develop a general equilibrium model with imperfect risk sharing and two sources of uncertainty shocks: (i) productivity uncertainty shocks, which affect the idiosyncratic volatility of firms’ productivity, and (ii) investment uncertainty shocks, which affect the idiosyncratic variability of firms’ investment opportunities.

Aug 30 | 9:10 am to 9:50 am

Pricing Macroeconomic Uncertainty

Presented by: Francesco Bianchi, Duke University
Co-Author(s): Howard Kungy, London Business School, Mikhail Tirskikh, London Business School
Aug 30 | 9:50 am to 10:30 am

Volatility Risk Pass-Through

Presented by: Mariano Croce, University of North Carolina–Chapel Hill
Co-Author(s): Riccardo Colacito, University of North Carolina–Chapel Hill, Yang Liu, University of Pennsylvania, Ivan Shaliastovich, The Wharton School

We show novel empirical evidence on the significance of output volatility (vol) shocks for both currency and international quantity dynamics. Focusing on G-17 countries, we document that: (1) consumption and output vols are imperfectly correlated within countries; (2) across countries, consumption vol is more correlated than output vol; (3) the pass-through of relative output vol shocks onto relative consumption vol is significant, especially for small countries; and (4) consumption differentials vol and exchange rate vol are disconnected.

Aug 30 | 10:50 am to 11:20 am

Trade Collapses: The role of Economic and Trade Policy Uncertainty in the Great Recession

Presented by: Kyle Handley, University of Michigan
Co-Author(s): Nuno Limão, University of Maryland Jeronimo Carballo, University of Colorado

We are submitting an extended abstract with a link in the abstract to a set of slides. We are awaiting additional disclosure of a large set of new results from the Census. Therefore, we have not consolidated our latest model new results into a complete draft. However, I can assure you a draft exists and the paper is more mature than it may appear from our submission. EXTENDED ABSTRACT The sharp economic downturn in 2008 triggered the "great trade collapse" (GTC)--- the largest worldwide trade contraction since WWII.

Aug 30 | 11:20 am to 12:00 pm

Rare Events and the Persistence of Uncertainty

Presented by: Savitar Sundaresan, Business School, Imperial College London

I present a novel methodology to deliver persistence in risk perceptions. Unlike long-term Bayesian learning, all of the parameters of the economy are known, and agents only collect information about shocks to narrow the variance of perceived signals. Collecting information affects not only period-by-period utility but affects the perceived distribution of future shocks, thus \emph{changing how information is collected in future periods}. This dynamic spillover leads to persistence in the variance of perceived distributions.