Uncertainty Matters: Evidence from Close Elections

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This paper uses a data rich environment to produce direct econometric estimates of macroeconomic and financial uncertainty for 11 advanced nations. These indices exhibit significant independent variation from popular proxies and provide a refinement of the influential work of [Jurado et al., 2015] that results in improved real-time performance. We use this new data in combination with narrative evidence to jointly identify macro uncertainty and financial shocks. Macro uncertainty shocks are identified with close elections and financial shocks with financial stress during financial crises. We find that macro uncertainty shocks matter for the majority of countries and that the real effects of macro uncertainty shocks are generally larger conditioning on close elections. These results are robust to controlling for news shocks and global uncertainty as well as a variety of shocks considered to be important drivers of the business cycle.