Agreed and Disagreed Uncertainty

Introduction

Since the seminal work of 2009, a wealth of research corroborates that uncertainty exerts potent recessionary impacts on a diversity of activity indicators. Notwithstanding, while recessions do synchronize with escalated uncertainty, protracted and elevated uncertainty is not invariably associated with recessions.

The perfect exemplifications are the stock market crash of October 1987, which precipitated significant losses in stock returns, and the debt-ceiling crisis in 2011, leading to a jump in U.S. government credit default swaps sans a contraction in real activity.

This paper asserts that the dispersion in consumer perspectives on the state of the economy, referred to as consumer disagreement, provides crucial insights about the systematic effect of uncertainty on economic activity.

A Dispersed Information Framework

This work initiates with a dispersed (and noisy) information framework; our argument hinges on information frictions appearing in models of sticky and noisy information.

We present a framework that paves way for differentiating agreed and disagreed uncertainty. Here, the observed uncertainty, quantified by the conditional volatility of the forecast error, is a function of innovations in the volatility of fundamental disturbances and innovations in the volatility of idiosyncratic noise.

This highlights the potential for both volatility types to influence observed uncertainty. The primary premise of this study is that innovation in the volatility of idiosyncratic noise could amplify measured uncertainty, without an alteration in the volatility of exogenous fundamental disturbances, and the uncertainty surge may not necessarily wield depressing effects on economic activity.

Consumer Disagreement and Evidence

We furnish new revelations from the Michigan Survey of Consumers on the prevalence of dispersion of information manifested in our new index that captures the disparity of consumers' opinions about current and future economic conditions.

First, consumer disagreement is pervasive and applies to both current and future economic conditions. Second, it is pro-cyclical and negatively correlated with widely recognized measures of economic uncertainty. Finally, the pro-cyclicality of disagreement is time-varying: it heightens in recessions and diminishes during robust economic activity.

Analyzing the Core

The main analysis advances in two stages. Initially, we introduce a simple model with noisy and dispersed information that enlightens the interplay between disagreement and uncertainty. Following this, we exploit the model's predictions to develop simple sign restrictions in a Bayesian VAR model to identify shocks to agreed and disagreed uncertainty in the data.

Conclusion

This empirical investigation makes significant contributions to the expanding landscape of literature on the macroeconomic effects of economic uncertainty. We are pioneers in linking uncertainty and consumer disagreement. Our findings illuminate a novel channel in the propagation of uncertainty to economic activity, demonstrating that high consumer disagreement is a pertinent indicator for the dampened effect of uncertainty in the economy.