Uncertainty varies strongly over time, rising by 50% to 100% in recessions and by up to200% after major economic and political shocks. This paper shows that higher uncertaintyreduces the responsiveness of R&D to changes in business conditions - a "caution-effect" -making it more persistent over time. Thus, uncertainty will play a critical role in shaping thedynamics of R&D through the business cycle, and its response to technology policy. I alsoshow that if firms are increasing their level of R&D then the effect of uncertainty will benegative, while if firms are reducing R&D then the effect of uncertainty will be positive.
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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number
dp0792.
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