The Finance Uncertainty Multiplier

Iv n Alfaro (), Nicholas Bloom and Xiaoji Lin

No 01/2023, Working Papers from Centre for Household Finance and Macroeconomic Research (HOFIMAR), BI Norwegian Business School

Abstract: We show how real and financial frictions amplify, prolong and propagate the negative impact of uncertainty shocks. We first 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 in a panel of US firms. Using common proxies for financial constraints we show that ex-ante financially constrained firms cut their investment even more than unconstrained firms following an uncertainty shock. We then build a general equilibrium heterogeneous firms model with real and financial frictions, finding financial frictions: i) amplify uncertainty shocks by doubling their impact on output; ii) increase persistence by extending the duration of the drop by 50%; and iii) propagate uncertainty shocks by spreading their impact onto financial variables. These results highlight why in periods of greater financial frictions uncertainty can be particularly damaging

Keywords: Uncertainty; Financial frictions; Investment; Employment; Cash Holding; Equity payouts (search for similar items in EconPapers)
Pages: 76 pages
Date: 2023
New Economics Papers: this item is included in nep-cfn, nep-dge and nep-fdg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://biopen.bi.no/bi-xmlui/handle/11250/3124829

Related works:
Journal Article: The Finance Uncertainty Multiplier (2024)
Working Paper: The Finance Uncertainty Multiplier (2018)
Working Paper: The Finance Uncertainty Multiplier (2017)
Working Paper: The Finance-Uncertainty Multiplier (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:bbq:wpaper:0001

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