The Finance Uncertainty Multiplier

Iván Alfaro, Nicholas Bloom and Xiaoji Lin

Journal of Political Economy, 2024, vol. 132, issue 2, 577 - 615

Abstract: We show how real and financial frictions amplify, prolong, and propagate the negative impact of uncertainty shocks. We use a novel instrumentation strategy to address endogeneity in estimating the impact of uncertainty by exploiting differential firm exposure to exchange rate, policy, and energy price volatility. We show that financially constrained firms cut investment more than unconstrained firms following an uncertainty shock. We then build a general equilibrium heterogeneous firms model with real and financial frictions, finding that financial frictions (i) amplify uncertainty shocks by doubling their impact on output; (ii) increase persistence by doubling the duration of the drop; and (iii) propagate uncertainty shocks by spreading their impact onto financial variables.

Date: 2024
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://dx.doi.org/10.1086/726230 (application/pdf)
http://dx.doi.org/10.1086/726230 (text/html)
Access to the online full text or PDF requires a subscription.

Related works:
Working Paper: The Finance Uncertainty Multiplier (2023)
Working Paper: The Finance Uncertainty Multiplier (2018)
Working Paper: The Finance Uncertainty Multiplier (2017)
Working Paper: The Finance-Uncertainty Multiplier (2017)
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:ucp:jpolec:doi:10.1086/726230

Access Statistics for this article

More articles in Journal of Political Economy from University of Chicago Press
Bibliographic data for series maintained by Journals Division ().