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Really uncertain business cycles

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

Abstract

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.

Suggested Citation

  • Bloom, Nicholas & Floetotto, Max & Jaimovich, Nir & Saporta-Eksten, Itay & Terry, Stephen, 2013. "Really uncertain business cycles," LSE Research Online Documents on Economics 51526, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:51526
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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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