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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 vector autoregression 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, 2024. "Using Disasters to Estimate the Impact of Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(2), pages 720-747.
    • Handle: RePEc:oup:restud:v:91:y:2024:i:2:p:720-747.
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    File URL: http://hdl.handle.net/10.1093/restud/rdad036
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