Uncertain Times, uncertain measures

Michelle Alexopoulos () and Jon Cohen

Working Papers from University of Toronto, Department of Economics

Abstract: Are uncertainty shocks an important source of post WWII business cycle fluctuations? The evidence we present in this paper suggests they are. Using both the traditional measure of uncertainty – the stock market volatility index – and a new one - based on the number of New York Times’ articles on uncertainty and economic activity - we demonstrate that these shocks generate short sharp recessions and recoveries. Output, employment, productivity, consumption and investment all decrease in response to an unanticipated rise in uncertainty. Moreover, we find that wide spread changes in the level of uncertainty captured by our new newspaper index can account for between 10 and 25 percent of the short-run variation in these variables.

Keywords: Uncertainty shocks; Business cycles (search for similar items in EconPapers)
JEL-codes: E32 E2 C82 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-mac
Date: 2009-02-24

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