Empirical evidence on the dynamics of investment under uncertainty in the US

We study the effects of financial uncertainty on investment dynamics in the U.S. using a
vector autoregression with drifting parameters and stochastic volatilities. We find timevarying
negative effects of financial uncertainty shocks on investment. These effects
have declined in the post-WWII period but became more pronounced in the presence of
the zero lower bound episode. We also find that the response of inflation to uncertainty
shocks varies over time, and these shocks do not always act like aggregate demand
shocks. Remarkably, the relevance of financial uncertainty shocks is found to be
negligible during the Great Recession.