The Impact of Uncertainty Shocks

Nicholas Bloom

NBER Working Paper No. 13385
Issued in September 2007
NBER Program(s):Corporate Finance Program, Economic Fluctuations and Growth Program, International Finance and Macroeconomics Program, Monetary Economics Program, Productivity, Innovation, and Entrepreneurship Program

Uncertainty appears to jump up after major shocks like the Cuban Missile crisis, the assassination of JFK, the OPEC I oil-price shock and the 9/11 terrorist attack. This paper offers a structural framework to analyze the impact of these uncertainty shocks. I build a model with a time varying second moment, which is numerically solved and estimated using firm level data. The parameterized model is then used to simulate a macro uncertainty shock, which produces a rapid drop and rebound in aggregate output and employment. This occurs because higher uncertainty causes firms to temporarily pause their investment and hiring. Productivity growth also falls because this pause in activity freezes reallocation across units. In the medium term the increased volatility from the shock induces an overshoot in output, employment and productivity. Thus, second moment shocks generate short sharp recessions and recoveries. This simulated impact of an uncertainty shock is compared to VAR estimations on actual data, showing a good match in both magnitude and timing. The paper also jointly estimates labor and capital convex and non-convex adjustment costs. Ignoring capital adjustment costs is shown to lead to substantial bias while ignoring labor adjustment costs does not.

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Document Object Identifier (DOI): 10.3386/w13385

Published: Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05. citation courtesy of

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