The Nonlinear Effects of News through Uncertainty

Résumé

We put forward the idea that news and uncertainty are closely connected. More specifically, news about future events, whose effects are not perfectly predictable, generate uncertainty. The combination of news and uncertainty makes the effects of news shocks nonlinear. We propose a simple procedure based on linear Structural Vector Autoregressions to estimate nonlinear impulse response functions. Big bad news tend to have higher eects on real variables than positive news since uncertainty exacerbates the negative first moment effect of bad news and mitigates the positive first moment effects of positive news.