Using Disasters to Estimate the Impact of Uncertainty

Scott Baker, Nicholas Bloom and Stephen Terry

The Review of Economic Studies, 2024, vol. 91, issue 2, 720-747

Abstract: Uncertainty rises in recessions and falls in booms. But what is the causal relationship? We construct cross-country panel data on stock market returns to proxy for first- and second-moment shocks and instrument these with natural disasters, terrorist attacks, and political shocks. Our IV regression results reveal a robust negative short-term impact of second moments (uncertainty) on growth. Employing multiple vector autoregression estimation approaches, relying on a range of identifying assumptions, also reveals a negative impact of uncertainty on growth. Finally, we show that these results are reproducible in a conventional micro–macro business cycle model with time-varying uncertainty.

Keywords: Uncertainty; Natural disasters; Political shocks; Growth (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (6)

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Working Paper: Using Disasters to Estimate the Impact of Uncertainty (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:91:y:2024:i:2:p:720-747.

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