The Impact of Uncertainty Shocks: Firm Level Estimation and a 9/11 Simulation

Nicholas Bloom ()

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: Uncertainty appears to vary strongly over time, temporarily rising by up to 200% aroundmajor shocks like the Cuban Missile crisis, the assassination of JFK and 9/11. This paperoffers the first structural framework to analyze uncertainty shocks. I build a model with atime varying second moment, which is numerically solved and estimated using firm leveldata. The parameterized model is then used to simulate a macro uncertainty shock, whichproduces a rapid drop and rebound in employment, investment and productivity, and amoderate loss in GDP. This temporary impact of a second moment shock is different from thetypically persistent impact of a first moment shock, highlighting the importance forpolicymakers of identifying their relative magnitudes in major shocks. The simulation of anuncertainty shock is then compared to actual 9/11 data, displaying a surprisingly good match.

Keywords: Labor; investment; uncertainty; real options (search for similar items in EconPapers)
JEL-codes: D92 E22 D8 C23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2006-03
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Persistent link: http://EconPapers.repec.org/RePEc:cep:cepdps:dp0718

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