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We study the time-varying effects of financial uncertainty shocks in the United States using a vector autoregression with drifting parameters and stochastic volatilities. We find negative effects of financial uncertainty shocks on real activity with both consumption and investment growth declining significantly and comoving along the entire sample. These effects remained fairly stable in the post-WWII period but the negative response of investment growth became more pronounced during the Zero Lower Bound episode. Our findings lend empirical support to theoretical frameworks that can successfully capture this macroeconomic comovement following an uncertainty shock. Remarkably, we find a limited role for financial uncertainty shocks during the Great Recession.
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