Working Paper: NBER ID: w27167
Authors: Scott R. Baker; Nicholas Bloom; Stephen J. Terry
Abstract: Uncertainty rises in recessions and falls in booms. But what is the causal relationship? We construct cross-country panel data on stock market returns to proxy for first- and second-moment shocks and instrument these with natural disasters, terrorist attacks, and political shocks. Our IV regression results reveal a robust negative short-term impact of second moments (uncertainty) on growth. Employing multiple VAR estimation approaches, relying on a range of identifying assumptions, also reveals a negative impact of uncertainty on growth. Finally, we show that these results are reproducible in a conventional micro-macro business cycle model with time-varying uncertainty.
Keywords: Uncertainty; Economic Growth; Disasters; Instrumental Variables; Business Cycles
JEL Codes: C23; D8; D92; E22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| first-moment proxy (Y20) | GDP growth (O49) |
| second-moment proxy (C69) | GDP growth (O49) |
| uncertainty (D89) | economic growth (O49) |
| uncertainty (D89) | economic activity (E20) |
| first-moment shocks (C69) | economic cycles (E32) |
| second-moment shocks (C69) | economic cycles (E32) |