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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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Keywords: Macroeconomic Uncertainty; Forecast Errors;

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References

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  1. 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.
  2. 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.
  3. Catherine Fuss & Philip Vermeulen, 2004. "Firms' investment decisions in response to demand and price uncertainty," Working Paper Research, National Bank of Belgium 45, National Bank of Belgium.
  4. Ramey, Valerie A. & Shapiro, Matthew D., 1998. "Costly capital reallocation and the effects of government spending," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 48(1), pages 145-194, June.
  5. Jesus Fernandez-Villaverde & Pablo Guerron-Quintana & Juan F. Rubio-Ramírez & Martin Uribe, 2009. "Risk Matters: The Real Effects of Volatility Shocks," PIER Working Paper Archive 09-013, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  6. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, Econometric Society, vol. 58(1), pages 113-44, January.
  7. Jon Cohen & Michelle Alexopoulos, 2009. "Uncertain Times, Uncertain Measures," 2009 Meeting Papers, Society for Economic Dynamics 1211, Society for Economic Dynamics.
  8. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta-Eksten & Stephen Terry, 2013. "Really Uncertain Business Cycles," CEP Discussion Papers, Centre for Economic Performance, LSE dp1195, Centre for Economic Performance, LSE.
  9. Robert Rich & Joseph Tracy, 2006. "The relationship between expected inflation, disagreement, and uncertainty: evidence from matched point and density forecasts," Staff Reports, Federal Reserve Bank of New York 253, Federal Reserve Bank of New York.
  10. 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.
  11. Gilchrist, Simon & Yankov, Vladimir & Zakrajsek, Egon, 2009. "Credit market shocks and economic fluctuations: Evidence from corporate bond and stock markets," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(4), pages 471-493, May.
  12. 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, Duncker & Humblot, Berlin, vol. 128(2), pages 307-319.
  13. Ruediger Bachmann & Christian Bayer, 2009. "Firm-Specific Productivity Risk over the Business Cycle: Facts and Aggregate Implications," 2009 Meeting Papers, Society for Economic Dynamics 869, Society for Economic Dynamics.
  14. repec:aeq:aeqsjb:v128:y2008:i2:q2:p307-319 is not listed on IDEAS
  15. Luigi Guiso & Giuseppe Parigi, 1999. "Investment And Demand Uncertainty," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(1), pages 185-227, February.
  16. Bomberger, William A, 1996. "Disagreement as a Measure of Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 28(3), pages 381-92, August.
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  19. Robert B. Barsky & Eric R. Sims, 2009. "News Shocks," NBER Working Papers 15312, National Bureau of Economic Research, Inc.
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