EconPapers    
Economics at your fingertips  
 

A New Look at Uncertainty Shocks: Imperfect Information and Misallocation

Tatsuro Senga ()

No 763, Working Papers from Queen Mary University of London, School of Economics and Finance

Abstract: Uncertainty faced by individual firms appears to be heterogeneous. In this paper, I construct new empirical measures of firm-level uncertainty using data from the I/B/E/S and Compustat. These new measures reveal persistent differences in the degree of uncertainty facing individual firms not reflected by existing measures. Consistent with existing measures, I find that the average level of uncertainty across firms is countercyclical, and that it rose sharply at the start of the Great Recession. I next develop a heterogeneous firm model with Bayesian learning and uncertainty shocks to study the aggregate implications of my new empirical findings. My model establishes a close link between the rise in firms' uncertainty at the start of a recession and the slow pace of subsequent recovery. These results are obtained in an environment that embeds Jovanovic's (1982) model of learning in a setting where each firm gradually learns about its own productivity, and each occasionally experiences a shock forcing it to start learning afresh. Firms differ in their information; more informed firms have lower posterior variances in beliefs. An uncertainty shock is a rise in the probability that any given firm will lose its information. When calibrated to reproduce the level and cyclicality of my leading measure of firm-level uncertainty, the model generates a prolonged recession followed by anemic recovery in response to an uncertainty shock. When confronted with a rise in firm-level uncertainty consistent with advent of the Great Recession, it explains 79 percent of the observed decline in GDP and 89 percent of the fall in investment.

Keywords: Uncertainty; Learning; Misallocation and business cycles (search for similar items in EconPapers)
JEL-codes: E22 E32 D8 D92 (search for similar items in EconPapers)
Date: 2015-12-14
References: Add references at CitEc
Citations: View citations in EconPapers (8) Track citations by RSS feed

Downloads: (external link)
https://www.qmul.ac.uk/sef/media/econ/research/wor ... 2015/items/wp763.pdf (application/pdf)

Related works:
Working Paper: A New Look at Uncertainty Shocks: Imperfect Information and Misallocation (2015) Downloads
Working Paper: New Look at Uncertainty Shocks: Imperfect Information and Misallocation (2015) Downloads
Working Paper: A New Look at Uncertainty Shocks: Imperfect Information and Misallocation (2014) Downloads
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:qmw:qmwecw:763

Access Statistics for this paper

More papers in Working Papers from Queen Mary University of London, School of Economics and Finance Contact information at EDIRC.
Bibliographic data for series maintained by Nicholas Owen ().

 
Page updated 2019-08-17
Handle: RePEc:qmw:qmwecw:763