The impact of macroeconomic uncertainty on the relationship between financial volatility and real economic activity

Abstract

A stock market volatility index is a widely used proxy of uncertainty in the macroeconomy, where a rise in the index dampens real economic activity. By contrast, the macroeconomic uncertainty index proposed by Jurado et al. (2015) measures the predictability of a wide range of macroeconomic indicators and thus, is a comprehensive indicator of macroeconomy-wide uncertainty. This study empirically investigates the nonlinear link between financial volatility and real economic activity based on the level of the macroeconomic uncertainty index. Employing data from the United States and Japan, the empirical analysis suggests that an increase in financial volatility lowers industrial production and business-fixed investment more persistently when macroeconomic uncertainty is higher.