Creative Destruction and Uncertainty

SedlÃ¡Ä ek, Petr
Authors registered in the RePEc Author Service: Petr Sedlacek

No 11296, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Recessions are times of high uncertainty. But does uncertainty cause downturns or vice versa? This paper argues that counter-cyclical fluctuations in uncertainty are, to a large extent, a natural result of creative destruction. I show analytically how aggregate growth and firm-level uncertainty are linked when firms gradually adopt a leading technology: expansions of the technological frontier widen the dispersion of firm-level productivity shocks, a benchmark measure of uncertainty. In a model of endogenous firm dynamics a technological expansion spurs a creative destruction process generating a temporary downturn and rendering uncertainty counter-cyclical. These predictions are confirmed in U.S. data showing that creative destruction accounts for 20 to 40 percent of overall variation in firm-level uncertainty.

Keywords: Uncertainty; Creative destruction; Business cycles (search for similar items in EconPapers)
JEL-codes: D22 D80 E32 (search for similar items in EconPapers)
Date: 2016-05
New Economics Papers: this item is included in nep-bec and nep-mac
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Journal Article: Creative Destruction and Uncertainty (2020)
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