Really Uncertain Business Cycles

Nicholas Bloom, Max Floetotto, Nir Jaimovich, Itay Saporta-Eksten, Stephen J. Terry

NBER Working Paper No. 18245
Issued in July 2012
NBER Program(s):   EFG   ME   PR

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.

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Acknowledgments

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