Session 2: Identification

Chair: Hoang Nguyen

Gary Koop: Distinguishing between Macroeconomic and Financial Uncertainty: Classification Search in Stochastic Volatility in Mean VARs

Abstract: Stochastic Volatility in Mean Vector Autoregressive models (SVMVARs) are a popular tool for measuring macroeconomic and financial uncertainty and their economic impacts. SVMVARs estimate macroeconomic (financial) uncertainty using a large set of macroeconomic (financial) variables. But what if there is uncertainty regarding whether variables are classified as macroeconomic or financial? We address this question, developing scalable Markov chain Monte Carlo algorithms for classification search in large SVMVARs with unclassified variables. Using time-invariant or time-varying classification, the algorithm determines whether each unclassified variable should be treated as macroeconomic or financial. We show that allowing for data-driven classification improves model fit. Our results also suggest that without data-driven classification, macroeconomic uncertainty, its adverse effects and its contribution to fluctuations in economic variables tend to be underestimated. Financial uncertainty is also underestimated but its effects on headline macroeconomic variables tend to be overestimated.

Mirela S. Miescu: Corporate earnings shocks and economic activity

Abstract: Around 80% of non-financial corporate loans in the US are earnings backed. Thus, shocks to corporate earnings relax firms’ borrowing constraints and are crucial in understanding the macroeconomic effects of financial disturbances. In this paper we examine the effects of corporate earnings shocks on economic activity. The identification relies on the assumption that earnings shocks are more volatile than other disturbances on days with high profile corporate earning announcements. We find that a favorable shock to corporate earnings has substantial consequences for the US economy: stock prices increase, credit conditions improve, output, loans and prices rise considerably while the monetary policy tightens in face of the expansionary developments. The shock has powerful international effects.

Wouter Van der Veken: Business Cycle Fluctuations: Financial Shocks versus Uncertainty Shocks

Abstract: What are the economic implications of financial and uncertainty shocks? By using a structural VAR, we show that financial shocks cause a decline in output and goods prices, while uncertainty shocks cause a decline in output and an increase in goods prices. In response to uncertainty shocks, firms increase their markups, in line with the theory of self-insurance against being stuck with too low a price. This explains why goods prices increase at the onset of a recession originated in financial markets. Financial and uncertainty shocks explain a large fraction of fluctuations in output and prices during the global financial crisis, while cost-push and demand forces prevail during the COVID-19 pandemic.