Nonlinear effects of uncertainty shocks: State dependency and asymmetry

Abstract The nonlinear effects of uncertainty shocks on U.S. macroeconomy are examined using a smooth transition VAR model in which the dynamic relationship between the variables changes with the level of economic policy uncertainty. Our results show that the nonlinear effects of uncertainty shocks depend on the current level of uncertainty, with uncertainty shocks behaving more like stronger demand shocks in the high‐uncertainty period than in the low period. Hence, we can conclude that the negative demand shock channel of uncertainty shocks, documented in the literature, is valid especially in the high‐uncertainty period.