Working Paper: NBER ID: w19475
Authors: Scott R. Baker; Nicholas Bloom
Abstract: A growing body of evidence suggests that uncertainty is counter cyclical, rising sharply in recessions and falling in booms. But what is the causal relationship between uncertainty and growth? To identify this we construct cross country panel data on stock market levels and volatility as proxies for the first and second moments of business conditions. We then use natural disasters, terrorist attacks and unexpected political shocks as instruments for our stock market proxies of first and second moment shocks. We find that both the first and second moments are highly significant in explaining GDP growth, with second moment shocks accounting for at least a half of the variation in growth. Variations in higher moments of stock market returns appear to have little impact on growth.
Keywords: Uncertainty; Economic Growth; Natural Disasters; Terrorist Attacks; Political Shocks
JEL Codes: D92; E20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| first moment shock (reduction in stock market levels) (E32) | GDP growth (O49) |
| second moment shock (increase in stock market volatility) (E32) | GDP growth (O49) |
| natural disasters (H84) | stock market levels (G10) |
| political shocks (F69) | stock market volatility (G17) |
| revolutions (P39) | stock market volatility (G17) |