Uncertainty and Business Cycle Asymmetry

We investigate the link between macroeconomic uncertainty and business cycle asymmetry of the U.S. economy. To this end, we propose an unobserved component model in which the shocks are asymmetrically distributed, and the degree of asymmetry varies with macroeconomic uncertainty. An efficient Bayesian MCMC algorithm is developed. Empirical results suggest that asymmetry in the U.S. business cycles is closely associated with macroeconomic uncertainty. Specifically, high macroeconomic uncertainty tends to be associated with large and negative shocks to the cyclical components. During times of high uncertainty, the probability density of output growth skews to the left, and growth vulnerability increases.