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The impact of uncertainty shocks: firm level estimation and a 9/11 simulation

Nicholas Bloom ()

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Uncertainty appears to vary strongly over time, temporarily rising by up to 200% around major shocks like the Cuban Missile crisis, the assassination of JFK and 9/11. This paper offers the first structural framework to analyze 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 employment, investment and productivity, and a moderate loss in GDP. This temporary impact of a second moment shock is different from the typically persistent impact of a first moment shock, highlighting the importance for policymakers of identifying their relative magnitudes in major shocks. The simulation of an uncertainty shock is then compared to actual 9/11 data, displaying a surprisingly good match.

Keywords: Labor; investment; uncertainty; real options (search for similar items in EconPapers)
JEL-codes: C23 D8 E22 D92 (search for similar items in EconPapers)
Date: 2006-03
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http://eprints.lse.ac.uk/19867/ Open access version. (application/pdf)

Related works:
Working Paper: The Impact of Uncertainty Shocks: Firm Level Estimation and a 9/11 Simulation (2006) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:19867

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