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Uncertainty and Economic Activity: Evidence from Business Survey Data

  • Steffen Elstner

    (IFO Institute)

  • Eric Sims

    (University of Notre Dame)

  • Ruediger Bachmann

    (University of Michigan)

What is the impact of time-varying business uncertainty on economic activity? Using partly confidential business survey data from the U.S. and Germany in structural VARs, we find that positive innovations to business uncertainty lead to prolonged declines in economic activity. In contrast, their high-frequency impact is small. We find no evidence of the "wait-and-see"-effect - large declines of economic activity on impact and subsequent fast rebounds - that the recent literature associates with positive uncertainty shocks. Rather, positive innovations to business uncertainty have effects similar to negative business confidence innovations. Once we control for their low-frequency effect, we find little statistically or economically significant impact of uncertainty innovations on activity. We argue that high uncertainty events are a mere epiphenomenon of bad economic times: recessions breed uncertainty.

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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 614.

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Date of creation: 2010
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Handle: RePEc:red:sed010:614
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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