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The Impact of Uncertainty Shocks: Firm Level Estimation and a 9/11 Simulation

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  • Nick Bloom

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.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0718.

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Date of creation: Mar 2006
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Handle: RePEc:cep:cepdps:dp0718

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Keywords: Labor; investment; uncertainty; real options;

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Cited by:
  1. Bernard, Andrew & Redding, Stephen J & Schott, Peter, 2005. "Products and Productivity," CEPR Discussion Papers 5126, C.E.P.R. Discussion Papers.
  2. Nicholas Bloom, 2007. "Uncertainty and the Dynamics of R&D," Discussion Papers 07-021, Stanford Institute for Economic Policy Research.
  3. Nicholas Bloom & Raffaella Sadun & John Van Reenen, 2012. "Americans Do IT Better: US Multinationals and the Productivity Miracle," American Economic Review, American Economic Association, vol. 102(1), pages 167-201, February.
  4. Nick Bloom & Stephen Bond & John Van Reenen, 2007. "Uncertainty and Investment Dynamics," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 391-415.
  5. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
  6. Francois Gourio, 2007. "Disasters and Recoveries: A Note on the Barro-Rietz Explanation of the Equity Premium Puzzle," Boston University - Department of Economics - Working Papers Series WP2007-007, Boston University - Department of Economics.
  7. William Miles, 2009. "Irreversibility, Uncertainty and Housing Investment," The Journal of Real Estate Finance and Economics, Springer, vol. 38(2), pages 173-182, February.
  8. Contreras, Juan, 2006. "An Empirical Model of Factor Adjustment Dynamics," MPRA Paper 9797, University Library of Munich, Germany.
  9. Marco Lombardi & Raphael A. Espinoza & Fabio Fornari, 2009. "The Role of Financial Variables in Predicting Economic Activity in the Euro Area," IMF Working Papers 09/241, International Monetary Fund.

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