I study real effects of uncertainty shocks. Using time-varying volatility of the forecast error, I construct a two-part uncertainty metric that consists of persistent and volatile, burstlike components. These indices are used to study empirically several predictions of uncertainty models: that uncertainty shocks have real effects, that these effects realize in a downturn/overshoot pattern and that persistence of uncertainty shocks decreases this pattern's frequency and increases its amplitude.

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... sing the constructed metric in a simple VAR framework I show that real effects are there, that shock to the volatile uncertainty causes significant downturn/overshoot pattern, and that shock to the persistent component causes severe and prolonged damage. JEL Classification: C53, E32, G12, G35, L25