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Really Uncertain Business Cycles

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Listed:
  • Nicholas Bloom
  • Max Floetotto
  • Nir Jaimovich
  • Itay Saporta†Eksten
  • Stephen J. Terry

Abstract

We investigate the role of uncertainty in business cycles. First, we demonstrate that microeconomic uncertainty rises sharply during recessions, including during the Great Recession of 2007–2009. Second, we show that uncertainty shocks can generate drops in gross domestic product of around 2.5% in a dynamic stochastic general equilibrium model with heterogeneous firms. However, we also find that uncertainty shocks need to be supplemented by first†moment shocks to fit consumption over the cycle. So our data and simulations suggest recessions are best modelled as being driven by shocks with a negative first moment and a positive second moment. Finally, we show that increased uncertainty can make first†moment policies, like wage subsidies, temporarily less effective because firms become more cautious in responding to price changes.

Suggested Citation

  • Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta†Eksten & Stephen J. Terry, 2018. "Really Uncertain Business Cycles," Econometrica, Econometric Society, vol. 86(3), pages 1031-1065, May.
  • Handle: RePEc:wly:emetrp:v:86:y:2018:i:3:p:1031-1065
    DOI: 10.3982/ECTA10927
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    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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