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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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19475.

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Date of creation: Sep 2013
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Handle: RePEc:nbr:nberwo:19475

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Cited by:
  1. Gabriel P. Mathy & Nicholas L. Ziebarth, 2014. "How Much Does Political Uncertainty Matter? The Case of Louisiana Under Huey Long," Working Papers, American University, Department of Economics 2014-06, American University, Department of Economics.
  2. Mecikovsky, Ariel & Meier, Matthias, 2014. "Do plants freeze upon uncertainty shocks?," EconStor Preprints 100662, ZBW - German National Library of Economics.
  3. Nicholas Bloom, 2014. "Fluctuations In Uncertainty," Working Papers 14-17, Center for Economic Studies, U.S. Census Bureau.
  4. Kyle Jurado & Sydney C. Ludvigson & Serena Ng, 2013. "Measuring Uncertainty," NBER Working Papers 19456, National Bureau of Economic Research, Inc.

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