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Session 6: Macroeconomics of Uncertainty and Volatility

August 22 - 24, 2018

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 is incredibly 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 macroeconomist started working on these issues from a more systematic basis. Nevertheless, the preliminary results in the literature, to which all three of us have contributed, are rather encouraging. 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 22 | 12:00 pm to 1:00 pm

Check-In, Lunchtime Discussion

Aug 22 | 1:00 pm to 1:40 pm

What Triggers Stock Market Jumps?

Presented by: Marco Sammon, Northwestern University
Co-Author(s): Scott Baker, Northwestern University; Nick Bloom, Stanford University; Steve Davis, Chicago University
Aug 22 | 1:40 pm to 2:20 pm

Equity Premiums in the Presidential Cycle: The Midterm Election Resolution of Uncertainty

Presented by: Terry Marsh, University of California, Berkeley
Co-Author(s): Kam Fong Chan, University of Queensland

We analyze shifts in political uncertainty and equity premiums over the U.S. Presidential election cycle. Somewhat ironically, it is midterm elections that turn out to be associated with the highest pre-election increases in uncertainty, leading to higher equity premiums postmidterm as the policy uncertainty and ex ante risk premiums decrease. We show this to have been the case for federal elections held over the past two centuries.

Aug 22 | 2:20 pm to 3:00 pm

Expectation Formation Following Large Unexpected Shocks

Presented by: Xuguang Simon Sheng, American University
Co-Author(s): Tucker McElroy, U.S. Census Bureau; Scott Baker, Northwestern University

By matching a large database of individual forecaster data with the universe of sizable natural disasters across 54 countries, we identify a set of new stylized facts: (i) forecasters are persistently heterogeneous in how often they issue or revise a forecast; (ii) information rigidity declines significantly following large, unexpected natural disaster shocks; (iii) the response of forecast disagreement displays heterogeneous patterns: attentive forecasters tend to move away from the previous consensus following a disaster while the opposite is true for inattentive forecasters.

Aug 22 | 3:30 pm to 4:10 pm

Monetary Policy Uncertainty

Presented by: John Rogers, Federal Reserve Board
Co-Author(s): Lucas Husted, Columbia University; Bo Sun, Federal Reserve Board

We construct new measures of uncertainty about Federal Reserve policy actions and their consequences, monetary policy uncertainty (MPU) indexes. Positive shocks to MPU raise credit spreads and reduce output. These effects are as large as those of conventionally identified monetary policy shocks. We also construct an index that captures uncertainty about monetary policy over the short term. Shocks to short-run MPU are estimated to have significantly smaller transmission effects.

Aug 22 | 4:10 pm to 4:50 pm

Economic Policy, Uncertainty, Political Uncertainty and the Greek Economic Crisis

Presented by: Gikas Hardouvelis, University of Piraeus
Co-Author(s): Georgios Karalas, London School of Economics; Dimitrios Karanastasis, University of Piraeus; Panagiotis Samartzis, University of Piraeus

We use textual analysis to construct an index of economic policy uncertainty (EPU) for Greece from 1998 to 2017, similar to other international EPU indices. We also construct indices of political uncertainty (POLU) and economic uncertainty (EU), plus EPU sub-indices related to fiscal policy (EPUF, partitioned into debt EPUD and tax EPUT)), monetary policy (EPUM), banking (EPUB), currency or Grexit possibility (EPUC), and pension policy (EPUP). The indices are positively correlated yet retain substantial idiosyncratic variability.

Aug 22 | 4:50 pm to 5:30 pm

Economic Policy, Uncertainty and Stock Market Participation

Presented by: Dimitris Georgarakos, European Central Bank and University of Leicester
Co-Author(s): Eniko Gábor-Tóth, Deutsche Bundesbank and CEU

Does economic policy uncertainty affect household stockholding? To answer this question we create a novel measure of household exposure to economic policy uncertainty news by combining survey information on the hours a household spends in reading newspapers and the frequency of such news in the popular press during a household’s pre-interview period.

Aug 22 | 5:30 pm


Aug 23 | 8:00 am to 8:30 am

Check-In, Coffee and Pastries

Aug 23 | 8:30 am to 9:10 am

Measuring the Effects of Firm Uncertainty on Economic Activity: New Evidence from One Million Documents

Presented by: Frank Li, University of Michigan
Co-Author(s): Kyle Handley, University of Michigian.

We construct a new time-varying measure of firm-specific uncertainty from analyzing the text of company reports filed with the U.S. Securities and Exchange Commission. We explore the implications of idiosyncratic variation in firm-level uncertainty in the aggregate and with firmlevel microdata. We find the new measure is negatively correlated with growth in aggregate investment, GDP, and employment even after controlling for other measures of first moment shocks and aggregate uncertainty.

Aug 23 | 9:10 am to 9:50 am

Expectation Formation and Firm Activities: New Evidence from a Business Outlook Survey in Japan

Presented by: Tatsuro Senga, Queen Mary University of London
Co-Author(s): Cheng Chen, University of Hong Kong; Chang Sun, University of Hong Kong; Hongyong Zhang, RIETI

This paper uses the Japanese Business Outlook Survey to examine the role of expectations in shaping business investment and hiring plans. The survey is jointly conducted by the Japanese Ministry of Finance and the Cabinet Office over the sample of around 16,000 businesses on a quarterly basis. We combine firms’ qualitative assessments of micro- and macro-level business conditions and quantitative information like sales and investment. Our major findings are as follows.

Aug 23 | 10:10 am to 10:50 am

Uncertainty and Change: Survey Evidence of Firms' Subjective Beliefs

Presented by: Rüdiger Bachmann, University of Notre Dame
Co-Author(s): Kai Carstensen, University of Kiel, CEPR; Stefan Lautenbacher, LMU Munich; Martin Schneider, Stanford University
Aug 23 | 10:50 am to 11:30 am

Slow Recovery with Uncertainty Shocks and Optimal Firm Liquidation

Presented by: Indrajit Mitra, University of Michigan

I show that accounting for heterogeneity in the borrowing constraints faced by firms can explain the slow recovery of output and investment following a severe financial crisis. My model predicts a slower recovery if small and medium-sized firms emerge from the crisis with significantly weaker balance sheets than large firms. I derive this result in an environment in which borrowing constraints arise endogenously due to an agency friction.

Aug 23 | 11:30 am to 12:10 pm

How Do Investors Perceive the Risks from Macroeconomic and Financial Uncertainty? Evidence from 19 Option Markets

Presented by: Ian Dew-Becker, Northwestern University
Co-Author(s): Bryan Kelly, Yale University; Stefano Giglio, Yale University

This paper studies the pricing of shocks to implied and realized volatility using options in 19 different markets, covering financials, metals, energies, and agricultural products. The markets are directly related to the state of the macroeconomy and financial markets, and investors can use the options to separately hedge shocks to real uncertainty and to the realization of volatility. Historically, realized volatility has earned a robustly negative risk premium, indicating that high macroeconomic volatility is associated with high marginal utility.

Aug 23 | 12:10 pm to 1:10 pm

Lunchtime Discussion

Aug 23 | 1:10 pm to 1:50 pm

A Neoclassical Theory of Liquidity Traps

Presented by: Sebastian Di Tella, Stanford University

This paper provides an equilibrium theory of liquidity traps and the real effects of money. In an economy with incomplete risk sharing, money provides a safe store of value that prevents interest rates from falling enough during downturns, creating a persistent slump with depressed investment. This is an equilibrium outcome—prices are flexible, markets clear, and inflation is on target—but it’s not efficient. Investment is too high during booms and too low during liquidity traps.

Aug 23 | 1:50 pm to 2:30 pm

What are Uncertainty Shocks?

Presented by: Nicholas Kozeniauskas, New York University
Co-Author(s): Anna Orlik, Federal Reserve Board; Laura Veldkamp, New York University

One of the primary innovations in modern business cycle research is the idea that uncertainty shocks drive aggregate fluctuations. But changes in stock prices (VIX), disagreement among macro forecasters, and the cross-sectional dispersion in firms’ earnings, while all used to measure uncertainty, are not the same, either conceptually or statistically. Are these really measuring the same phenomenon and not just a collection of counter-cyclical second moments? If so, what is this shock that has such diverse impacts on the economy?

Aug 23 | 3:00 pm to 3:40 pm

Long-Run Economic Uncertainty

Presented by: Andrea Tamoni, London School of Economics
Co-Author(s): Federico Bandi, Johns Hopkins University

Higher long-run economic uncertainty predicts higher future long-run excess market returns. Over a 10-year horizon, the joint use of long-run uncertainty and the dividend-to-price ratio leads to a predictive R2 around 80%, half of which is imputable to long-run uncertainty. Given the near orthogonality between long-run uncertainty and the dividend-to-price ratio, this return predictability is justified by the ability of long-run uncertainty to predict future dividend growth (in excess of the risk-free rate) through lower inflation rates.

Aug 23 | 3:40 pm to 4:20 pm

The Dire Effects of the Lack of Monetary and Fiscal Coordination

Presented by: Francesco Bianchi, Duke University
Co-Author(s): Leonardo Melosi, Federal Reserve Chicago

What happens if the government's willingness to stabilize a large stock of debt is waning, while the central bank is adamant about preventing a rise in inflation? The large fiscal imbalance brings about inflationary pressures, triggering a vicious spiral of higher inflation, monetary tightening, output contraction, and further debt accumulation. Furthermore, the mere possibility of this institutional conflict represents a drag on the economy.

Aug 23 | 4:20 pm to 5:00 pm

News and Consumer Card Payments

Presented by: Juri Marcucci, Bank of Italy
Co-Author(s): Libero Monteforte, Bank of Italy; Simone Emiliozzi, Bank of Italy; Guerino Ardizzi, Bank of Italy

We exploit a unique daily data set on debit cards’ expenditures to study the reaction of consumption to news related to economic policy uncertainty (EPU) or to payment system security. Adopting big data techniques, we construct indexes of EPU and payment security using either articles from Bloomberg newswire or tweets from Twitter social network. Quarterly payments with cards are a proxy of consumption but at daily frequency should be treated in order to remove strong seasonal components.

Aug 23 | 5:00 pm


Aug 24 | 7:50 am to 8:20 am

Check-In, Coffee and Pastries

Aug 24 | 8:20 am to 9:00 am

Uncertainty, Investment and Productivity with Relational Contract

Presented by: James Malcomson, All Souls College, Oxford
Aug 24 | 9:00 am to 9:40 am

Uncertainty Shocks, Financial Frictions and Business Cycle Asymmetries Across Countries

Presented by: Pratiti Chatterjee, UC Irvine

This paper explores the interaction of uncertainty shocks and financial frictions in explaining the excess volatility of real variables in emerging countries vis-`a-vis advanced countries. I use an open economy DSGE model augmented with the financial accelerator mechanism, nominal rigidities and uncertainty evolving as the time-varying volatility of exogenous shocks. The model is solved using perturbation techniques about a third order approximation to the equilibrium conditions of the model.

Aug 24 | 10:00 am to 10:40 am

The Evolving Impact of Global, Region-Specific and Country-Specific Uncertainty

Presented by: Alberto Musso, European Central Bank
Co-Author(s): Haroon Mumtaz, Queen Mary College

We build a dynamic factor model with time-varying parameters and stochastic volatility and use it to decompose the variance of a large set of financial and macroeconomic variables for 22 OECD countries spanning from 1960 onwards into contributions from country-specific uncertainty, region-specific uncertainty and uncertainty common to all countries. We find that common global uncertainty plays a primary role in explaining the volatility of inflation, interest rates and stock prices, although to a varying extent over time.

Aug 24 | 10:40 am to 11:20 am

Uncertainty Matters: Evidence from Close Elections

Presented by: Chris Redl, Bank of England

This paper uses a data rich environment to produce direct econometric estimates of macroeconomic and nancial uncertainty for the G10. These indices exhibit signicant independent variation from popular proxies. Using this new data we control for both rst and second moment nancial shocks in identifying the real eects of macro uncertainty shocks. We further separate the identied macro shocks from nancial shocks using narrative information, requiring that macro uncertainty rises during close elections.

Aug 24 | 11:20 am to 12:00 pm

Short-Term Shocks and Long-Term Investment

Presented by: Stephen Terry, Boston University
Co-Author(s): Itay Saporta-Eksten, Tel Aviv University
Aug 24 | 12:00 pm to 1:00 pm

Lunchtime Discussion