Short- and Long-run Uncertainty

Firms respond to short-run uncertainty, say, over next week's oil prices, as well as to long-run uncertainty, for example about corporate tax rates far into the future. We study this empirically by exploiting the availability of implied volatility measures for options of different maturities, using this volatility curve to obtain separate proxies for short- and long-run uncertainty. Empirically, short- and long-run uncertainty are both associated with lower hiring and investment, but employment growth responds more to short-run uncertainty and vice-versa. These findings are consistent with evidence from a numerical model featuring two uncertainty processes of varying persistence. We also study potential drivers of short- and long-run uncertainty, finding that economic policy uncertainty is more closely associated with long-run uncertainty, and volatility in oil is linked with short-run uncertainty; however, exchange rate volatility and turnover of firm executives are associated about evenly with short- and long-run uncertainty. This is despite all of our potential drivers being correlated with the overall level of uncertainty.