Working Paper: NBER ID: w18245
Authors: Nicholas Bloom; Max Floetotto; Nir Jaimovich; Itay Saporta-Eksten; Stephen J. Terry
Abstract: We propose uncertainty shocks as a new shock that drives business cycles. First, we demonstrate that microeconomic uncertainty is robustly countercyclical, rising sharply during recessions, particularly during the Great Recession of 2007-2009. Second, we quantify the impact of time-varying uncertainty on the economy in a dynamic stochastic general equilibrium model with heterogeneous firms. We find that reasonably calibrated uncertainty shocks can explain drops and rebounds in GDP of around 3%. Moreover, we show that increased uncertainty alters the relative impact of government policies, making them initially less effective and then subsequently more effective.
Keywords: Uncertainty; Business Cycles; Dynamic Stochastic General Equilibrium; Total Factor Productivity
JEL Codes: E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dispersion of plant-level shocks to TFP (F16) | microeconomic uncertainty (D89) |
| variance of establishment-level sales growth rates (L25) | microeconomic uncertainty (D89) |
| uncertainty (D89) | effectiveness of government policies (F68) |
| dissipation of uncertainty (D80) | effectiveness of government policies (F68) |
| microeconomic uncertainty (D89) | economic performance (P17) |
| uncertainty shocks (D89) | GDP (E20) |