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Uncertain Times, uncertain measures

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  • Michelle Alexopoulos
  • Jon Cohen

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 University of Toronto, Department of Economics in its series Working Papers with number tecipa-352.

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Length: 57 pages
Date of creation: 24 Feb 2009
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-352

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Keywords: Uncertainty shocks; Business cycles;

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  1. Michelle Alexopoulos & Jon Cohen, 2009. "Measuring Our Ignorance, One Book at a Time: New Indicators of Technological Change, 1909-1949," Working Papers tecipa-349, University of Toronto, Department of Economics.
  2. Ben S. Bernanke, 1980. "Irreversibility, Uncertainty, and Cyclical Investment," NBER Working Papers 0502, National Bureau of Economic Research, Inc.
  3. 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.
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Cited by:
  1. 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.
  2. Steffen Elstner & Eric Sims & Ruediger Bachmann, 2010. "Uncertainty and Economic Activity: Evidence from Business Survey Data," 2010 Meeting Papers 614, Society for Economic Dynamics.
  3. Roel Beetsma & Massimo Giuliodori, 2011. "The Changing Macroeconomic Response to Stock Market Volatility Shocks," CESifo Working Paper Series 3652, CESifo Group Munich.
  4. Benjamin Born & Johannes Pfeifer, 2011. "Policy Risk and the Business Cycle," Bonn Econ Discussion Papers bgse06_2011, University of Bonn, Germany.
  5. Taisuke Nakata, 2012. "Optimal Fiscal and Monetary Policy with Occasionally Binding Zero Bound Constraints," 2012 Meeting Papers 181, Society for Economic Dynamics.
  6. Edward S. Knotek II & Shujaat Khan, 2011. "How do households respond to uncertainty shocks?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II.
  7. Daria Taglioni & Veronika Zavacka, 2012. "Innocent bystanders: How foreign uncertainty shocks harm exporters," Working Papers 149, European Bank for Reconstruction and Development, Office of the Chief Economist.
  8. Ryan Kellogg, 2010. "The Effect of Uncertainty on Investment: Evidence from Texas Oil Drilling," NBER Working Papers 16541, National Bureau of Economic Research, Inc.

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