Identifying Uncertainty Shocks Using the Price of Gold
48 Pages Posted: 24 Feb 2016
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Identifying Uncertainty Shocks Using the Price of Gold
Identifying Uncertainty Shocks Using the Price of Gold
Date Written: February 2016
Abstract
We propose a new instrument to identify the impact of uncertainty shocks in a SVAR model with external instruments. We construct the instrument for uncertainty shocks by exploiting variations in the price of gold around selected events. The events capture periods of changes in uncertainty unrelated to other macroeconomic shocks. The variations in the price of gold around such events provide a measure correlated with the underlying uncertainty shocks, due to the perception of gold as a safe haven asset. The proposed approach improves upon the recursive identification of uncertainty shocks by not restricting only one structural shock to potentially affect all variables in the system. Replicating Bloom (2009), we find that the recursive approach underestimates the effects of uncertainty shocks and their role in driving monetary policy.
Keywords: Economic uncertainty, external proxy SVAR, safe haven assets
JEL Classification: E32, C32, D81
Suggested Citation: Suggested Citation