The real effects of uncertainty shocks on economic activity: theary and empirical evidence

How does uncertainty affect the real economy? Is there a comovement among output, consumption, investment and worked hours after an uncertainty shock? To answer these questions, I examine the theoretical predictions of two widely used general equilibrium models, i.e. the Neo-Classical Business Cycle Model and the New-Keynesian DGSE Model, and provide empirical tests of whether they replicate the business cycle comovements observed in the data. The VAR-based analysis shows that an uncertainty shock triggers a negative response in real activity and prices, consistent with the claim that uncertainty shocks act as negative aggregate demand shocks. These findings lend support to the predictions put forth by the New-Keynesian theoretical framework.