Uncertainty and Business Cycle: a Review of the Literature and Some Evidence from the Spanish Economy

The article reviews the main economic mechanisms which have been theorised when considering the uncertainty/economic activity nexus, as well as the methods by which uncertainty is commonly proxied through observable quantities. Some empirical evidence on the role of uncertainty in shaping macroeconomic fluctuations for the case of the Spanish economy is also presented. We document that uncertainty tends to reduce the level of economic activity in the short run, although traces of overshooting cannot be detected.