A Simple Explanation of Countercyclical Uncertainty

Joshua Bernstein, Michael Plante, Alexander Richter and Nathaniel Throckmorton

American Economic Journal: Macroeconomics, 2024, vol. 16, issue 4, 143-71

Abstract: This paper documents that labor search and matching frictions generate countercyclical uncertainty because the inherent nonlinearity in the flow of new matches makes employment uncertainty increasing in the number of people searching for work. Quantitatively, this mechanism is strong enough to explain uncertainty and real activity dynamics, including their correlation. Through this lens, uncertainty fluctuations are endogenous responses to changes in real activity that neither affect the severity of business cycles nor warrant policy intervention, in contrast with leading theories of the interaction between uncertainty and real activity dynamics.

JEL-codes: D81 E23 E24 E32 J41 J63 J64 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1257/mac.20220134

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