Creative Destruction and Uncertainty

Petr Sedlacek

Journal of the European Economic Association, 2020, vol. 18, issue 4, 1814-1843

Abstract: Uncertainty rises in recessions. But does uncertainty cause downturns or vice versa? This paper argues that counter-cyclical uncertainty fluctuations are a by-product of technology growth. In a firm dynamics model with endogenous technology adoption, faster technology growth widens the dispersion of firm-level productivity shocks, a benchmark uncertainty measure. Moreover, faster technology growth spurs a creative destruction process, generates a temporary downturn, and renders uncertainty counter-cyclical. Estimates from structural vector autoregressions (VARs) on U.S. data confirm the model’s predictions. On average, 1/4 of the cyclical variation in uncertainty is driven by technology shocks. This fraction rises to 2/3 around the “dot-com” bubble.

Date: 2020
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Working Paper: Creative Destruction and Uncertainty (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:jeurec:v:18:y:2020:i:4:p:1814-1843.

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