EconPapers    
Economics at your fingertips  
 

The Impact of Uncertainty Shocks

Nicholas Bloom ()

Econometrica, 2009, vol. 77, issue 3, 623-685

Abstract: Uncertainty appears to jump up after major shocks like the Cuban Missile crisis, the assassination of JFK, the OPEC I oil-price shock, and the 9/11 terrorist attacks. This paper offers a structural framework to analyze the impact of these uncertainty shocks. I build a model with a time-varying second moment, which is numerically solved and estimated using firm-level data. The parameterized model is then used to simulate a macro uncertainty shock, which produces a rapid drop and rebound in aggregate output and employment. This occurs because higher uncertainty causes firms to temporarily pause their investment and hiring. Productivity growth also falls because this pause in activity freezes reallocation across units. In the medium term the increased volatility from the shock induces an overshoot in output, employment, and productivity. Thus, uncertainty shocks generate short sharp recessions and recoveries. This simulated impact of an uncertainty shock is compared to vector autoregression estimations on actual data, showing a good match in both magnitude and timing. The paper also jointly estimates labor and capital adjustment costs (both convex and nonconvex). Ignoring capital adjustment costs is shown to lead to substantial bias, while ignoring labor adjustment costs does not. Copyright 2009 The Econometric Society.

Date: 2009
References: Add references at CitEc
Citations View citations in EconPapers (871) Track citations by RSS feed

Downloads: (external link)
http://hdl.handle.net/10.3982/ECTA6248 link to full text (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: The Impact of Uncertainty Shocks (2007) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecm:emetrp:v:77:y:2009:i:3:p:623-685

Ordering information: This journal article can be ordered from
https://www.economet ... ordering-back-issues

Access Statistics for this article

Econometrica is currently edited by Daron Acemoglu

More articles in Econometrica from Econometric Society Contact information at EDIRC.
Series data maintained by Wiley-Blackwell Digital Licensing ().

 
Page updated 2017-10-06
Handle: RePEc:ecm:emetrp:v:77:y:2009:i:3:p:623-685