Using Disasters to Estimate the Impact of Uncertainty

Scott Baker, Nicholas Bloom and Stephen Terry

No 27167, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: C23 D8 D92 E22 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-mac, nep-ore and nep-rmg
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Citations: View citations in EconPapers (44)

Published as Scott R Baker & Nicholas Bloom & Stephen J Terry, 2024. "Using Disasters to Estimate the Impact of Uncertainty," Review of Economic Studies, vol 91(2), pages 720-747.

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Journal Article: Using Disasters to Estimate the Impact of Uncertainty (2024)
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