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
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)
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http://eprints.lse.ac.uk/19867/ Open access version. (application/pdf)
Working Paper: The Impact of Uncertainty Shocks: Firm Level Estimation and a 9/11 Simulation (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:19867
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