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Uncertain Times, Uncertain Measures

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  • Jon Cohen

    (University of Toronto)

  • Michelle Alexopoulos

    (University of Toronto)

Abstract

Are uncertainty shocks an important source of post WWII business cycle fluctuations? The evidence we present in this paper suggests they are. Using both the traditional measure of uncertainty – the stock market volatility index – and a new one - based on the number of New York Times’ articles on uncertainty and economic activity - we demonstrate that these shocks generate short sharp recessions and recoveries. Output, employment, productivity, consumption and investment all decrease in response to an unanticipated rise in uncertainty. Moreover, we find that wide spread changes in the level of uncertainty captured by our new newspaper index can account for between 10 and 25 percent of the short-run variation in these variables.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 1211.

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Date of creation: 2009
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Handle: RePEc:red:sed009:1211

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  1. Alexopoulos, Michelle & Cohen, Jon, 2009. "Measuring our ignorance, one book at a time: New indicators of technological change, 1909-1949," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 450-470, May.
  2. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November.
  3. Bernanke, Ben S, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, MIT Press, vol. 98(1), pages 85-106, February.
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