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Really Uncertain Business Cycles

  • Nicholas Bloom
  • Max Floetotto
  • Nir Jaimovich
  • Itay Saporta-Eksten
  • Stephen Terry

We propose uncertainty shocks as a new shock that drives business cycles. First, we demonstrate that microeconomic uncertainty is robustly countercyclical, rising sharply during recessions, particularly during the Great Recession of 2007-2009. Second, we quantify the impact of time-varying uncertainty on the economy in a dynamic stochastic general equilibrium model with heterogeneous firms. We find that reasonably calibrated uncertainty shocks can explain drops and rebounds in GDP of around 3%. Moreover, we show that increased uncertainty alters the relative impact of government policies, making them initially less effective and then subsequently more effective.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1195.

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Date of creation: Mar 2013
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Handle: RePEc:cep:cepdps:dp1195
Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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