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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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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. Andrew Bernard & Stephen Redding & Peter Schott, 2008. "Products and Productivity," Working Papers 08-22, Center for Economic Studies, U.S. Census Bureau.
  2. Nick Bloom & Raffaella Sadun & John Van Reenen, 2007. "Americans Do I.T. Better: US Multinationals and the Productivity Miracle," CEP Discussion Papers dp0788, Centre for Economic Performance, LSE.
  3. Nick Bloom, 2007. "Uncertainty and the Dynamics of R&D," CEP Discussion Papers dp0792, Centre for Economic Performance, LSE.
  4. Contreras, Juan, 2006. "An Empirical Model of Factor Adjustment Dynamics," MPRA Paper 9797, University Library of Munich, Germany.
  5. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
  6. Nick Bloom & Stephen Bond & John Van Reenen, 2006. "Uncertainty and Investment Dynamics," CEP Discussion Papers dp0739, Centre for Economic Performance, LSE.
  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. 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.
  9. 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.

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