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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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File URL: http://eprints.lse.ac.uk/51526/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 51526.

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Length: 57 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:ehl:lserod:51526
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