The Finance Uncertainty Multiplier

Iván Alfaro, Nicholas Bloom and Xiaoji Lin

No 24571, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E0 G0 (search for similar items in EconPapers)
Date: 2018-05
New Economics Papers: this item is included in nep-cfn, nep-dge, nep-mac and nep-pke
Note: CF EFG ME PR
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Citations: View citations in EconPapers (94)

Published as Iván Alfaro & Nicholas Bloom & Xiaoji Lin, 2024. "The Finance Uncertainty Multiplier," Journal of Political Economy, vol 132(2), pages 577-615.

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Related works:
Journal Article: The Finance Uncertainty Multiplier (2024)
Working Paper: The Finance Uncertainty Multiplier (2023)
Working Paper: The Finance Uncertainty Multiplier (2017)
Working Paper: The Finance-Uncertainty Multiplier (2017)
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