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Does Uncertainty Reduce Growth? Using Disasters as Natural Experiments

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  • Scott R. Baker
  • Nicholas Bloom

Abstract

A growing body of evidence suggests that uncertainty is counter cyclical, rising sharply in recessions and falling in booms. But what is the causal relationship between uncertainty and growth? To identify this we construct cross country panel data on stock market levels and volatility as proxies for the first and second moments of business conditions. We then use natural disasters, terrorist attacks and unexpected political shocks as instruments for our stock market proxies of first and second moment shocks. We find that both the first and second moments are highly significant in explaining GDP growth, with second moment shocks accounting for at least a half of the variation in growth. Variations in higher moments of stock market returns appear to have little impact on growth.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1243.

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Date of creation: Oct 2013
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Handle: RePEc:cep:cepdps:dp1243

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

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Keywords: Uncertainty; natural disasters; political shocks; growth;

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Cited by:
  1. Kyle Jurado & Sydney C. Ludvigson & Serena Ng, 2013. "Measuring Uncertainty," NBER Working Papers 19456, National Bureau of Economic Research, Inc.
  2. Nicholas Bloom, 2013. "Fluctuations in Uncertainty," CEP Occasional Papers 038, Centre for Economic Performance, LSE.

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