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Uncertainty and Economic Activity: Evidence from Business Survey Data

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  • Eric R. Sims

    ()
    (Department of Economics, University of Notre Dame)

Abstract

This paper uses survey expectations data from both Germany and the United States to construct empirical proxies for time-varying business-level uncertainty. Access to the con?dential micro data from the German IFO Business Climate Survey permits construction of uncertainty measures based on both ex-ante disagreement and on ex-post forecast errors. Ex-ante disagreement is strongly correlated with dispersion in ex-post forecast errors, lending credence to the widespread practice of proxying for uncertainty with disagreement. Surprise movements in either measure are associated with signi?cant reductions in production that abate fairly quickly. We extend our analysis to US data, measuring uncertainty with forecast disagreement from the Business Outlook Survey administered by the Federal Reserve Bank of Philadelphia. In contrast to the German case, surprise increases in forecast dispersion lead to large and persistent reductions in production and employment.

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File URL: http://www3.nd.edu/~tjohns20/RePEc/deendus/wpaper/014_uncertainty.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by University of Notre Dame, Department of Economics in its series Working Papers with number 014.

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Length: 49 pages
Date of creation: Jun 2012
Date of revision: Jun 2012
Handle: RePEc:nod:wpaper:014

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Web page: http://economics.nd.edu
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Keywords: Macroeconomic Uncertainty; Forecast Errors;

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References

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  1. Simon Gilchrist & Vladimir Yankov & Egon Zakrajsek, 2009. "Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets," NBER Working Papers 14863, National Bureau of Economic Research, Inc.
  2. Lutz Kilian, 1998. "Small-Sample Confidence Intervals For Impulse Response Functions," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 218-230, May.
  3. Pablo A. Guerron-Quintana & Martin Uribe & Juan Rubio-Ramirez & Jesús Fernández-Villaverde, 2009. "Risk Matters: The Real E¤ects of Volatility Shocks," 2009 Meeting Papers 237, Society for Economic Dynamics.
  4. Robert B. Barsky & Eric R. Sims, 2009. "Information, Animal Spirits, and the Meaning of Innovations in Consumer Confidence," NBER Working Papers 15049, National Bureau of Economic Research, Inc.
  5. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta-Eksten & Stephen Terry, 2013. "Really Uncertain Business Cycles," CEP Discussion Papers dp1195, Centre for Economic Performance, LSE.
  6. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
  7. Luigi Guiso & Giuseppe Parigi, 1999. "Investment And Demand Uncertainty," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 185-227, February.
  8. Catherine Fuss & Philip Vermeulen, 2004. "Firms' investment decisions in response to demand and price uncertainty," Working Paper Research 45, National Bank of Belgium.
  9. Valerie A. Ramey & Matthew D. Shapiro, 1999. "Costly Capital Reallocation and the Effects of Government Spending," NBER Working Papers 6283, National Bureau of Economic Research, Inc.
  10. Michelle Alexopoulos & Jon Cohen, 2009. "Uncertain Times, uncertain measures," Working Papers tecipa-352, University of Toronto, Department of Economics.
  11. Robert B. Barsky & Eric R. Sims, 2009. "News Shocks," NBER Working Papers 15312, National Bureau of Economic Research, Inc.
  12. Bachmann, Ruediger & Bayer, Christian, 2009. "Firm-specific productivity risk over the business cycle: facts and aggregate implications," Discussion Paper Series 1: Economic Studies 2009,15, Deutsche Bundesbank, Research Centre.
  13. Sascha O. Becker & Klaus Wohlrabe, 2007. "Micro Data at the Ifo Institute for Economic Research – The “Ifo Business Survey”, Usage and Access," Ifo Working Paper Series Ifo Working Paper No. 47, Ifo Institute for Economic Research at the University of Munich.
  14. repec:aeq:aeqsjb:v128:y2008:i2:q2:p307-319 is not listed on IDEAS
  15. Adina Popescu & Frank Rafael Smets, 2010. "Uncertainty, Risk-taking, and the Business Cycle in Germany," CESifo Economic Studies, CESifo, vol. 56(4), pages 596-626, December.
  16. Bomberger, William A, 1996. "Disagreement as a Measure of Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(3), pages 381-92, August.
  17. Sascha O. Becker & Klaus Wohlrabe, 2008. "European Data Watch: Micro Data at the Ifo Institute for Economic Research – The “Ifo Business Survey”, Usage and Access," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 128(2), pages 307-319.
  18. Robert Rich & Joseph Tracy, 2006. "The relationship between expected inflation, disagreement, and uncertainty: evidence from matched point and density forecasts," Staff Reports 253, Federal Reserve Bank of New York.
  19. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-44, January.
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