Essays on uncertainty

This dissertation consists of three essays on the real impacts of uncertainty shocks. The first essay investigates whether financial market volatility induces real downturns in a dynamic stochastic general equilibrium framework with heterogenous agents. In the model, an increase in the volatility of future stock price expectations of nonsophisticated agents causes an increase in the volatility of stock prices. This in turn generates a reduction in consumption, investment, employment and output. The model contributes to the literature by modeling financial market volatility in a general equilibrium framework, highlighting the mechanisms through which the impact works, and providing estimates of its magnitude. The second essay investigates whether financial development moderates the negative impact of uncertainty shocks on real economic activity. To address potential endogeneity concerns, the estimation is made using Two Stage Least Squares technique where plausibly exogenous disaster shocks are used as instruments for stock market volatility. The estimation results show that uncertainty shocks hurt countries with developed financial markets less. The third essay investigates the role of institutional characteristics of the central banks in moderating the negative consequences of uncertainty shocks using the same identification strategy as the second essay. The results provide strong evidence that central bank independence reduces the adverse effects of uncertainty shocks. As for the impact of central bank transparency, while in some specifications the results support its mitigating impact on the adverse effect of uncertanity, in others it doesn't have a significant moderating impact. Keywords: Uncertainty, Volatility Shocks, Financial Market Volatility, Business Cycles, Financial Development, Central Bank Independence, Central Bank Transparency.