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Using Disasters to Estimate the Impact of Uncertainty

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  • Scott R. Baker
  • Nicholas Bloom
  • Stephen J. Terry

Abstract

Uncertainty rises in recessions and falls in booms. But what is the causal relationship? We construct cross-country panel data on stock market returns to proxy for first- and second-moment shocks and instrument these with natural disasters, terrorist attacks, and political shocks. Our IV regression results reveal a robust negative short-term impact of second moments (uncertainty) on growth. Employing multiple VAR estimation approaches, relying on a range of identifying assumptions, also reveals a negative impact of uncertainty on growth. Finally, we show that these results are reproducible in a conventional micro-macro business cycle model with time-varying uncertainty.

Suggested Citation

  • Scott R. Baker & Nicholas Bloom & Stephen J. Terry, 2020. "Using Disasters to Estimate the Impact of Uncertainty," NBER Working Papers 27167, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:27167
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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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