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Short- and Long-run Uncertainty

Author

Listed:
  • Nicholas Bloom

    (Stanford University)

  • Ian Wright

    (Goldman Sachs)

  • Jose Maria Barrero

    (Stanford University)

Abstract

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.

Suggested Citation

  • Nicholas Bloom & Ian Wright & Jose Maria Barrero, 2016. "Short- and Long-run Uncertainty," 2016 Meeting Papers 1576, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:1576
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    References listed on IDEAS

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    1. Jerome Adda & Russell W. Cooper, 2003. "Dynamic Economics: Quantitative Methods and Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262012014, March.
    2. Dew-Becker, Ian & Giglio, Stefano & Le, Anh & Rodriguez, Marius, 2017. "The price of variance risk," Journal of Financial Economics, Elsevier, vol. 123(2), pages 225-250.
    3. Matthias Kehrig, 2011. "The Cyclicality of Productivity Dispersion," 2011 Meeting Papers 484, Society for Economic Dynamics.
    4. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
    5. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474, December.
    6. Egloff, Daniel & Leippold, Markus & Wu, Liuren, 2010. "The Term Structure of Variance Swap Rates and Optimal Variance Swap Investments," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(05), pages 1279-1310, October.
    7. Bachmann, Rüdiger & Bayer, Christian, 2013. "‘Wait-and-See’ business cycles?," Journal of Monetary Economics, Elsevier, vol. 60(6), pages 704-719.
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    Citations

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    Cited by:

    1. Hossein Asgharian & Charlotte Christiansen & Ai Jun Hou, 2017. "Economic Policy Uncertainty and Long-Run Stock Market Volatility and Correlation," CREATES Research Papers 2018-12, Department of Economics and Business Economics, Aarhus University.
    2. repec:sls:ipmsls:v:35:y:2018:2 is not listed on IDEAS
    3. Antonakakis, Nikolaos & Gabauer, David & Gupta, Rangan & Plakandaras, Vasilios, 2018. "Dynamic connectedness of uncertainty across developed economies: A time-varying approach," Economics Letters, Elsevier, vol. 166(C), pages 63-75.
    4. repec:eee:finana:v:63:y:2019:i:c:p:105-118 is not listed on IDEAS
    5. Rangan Gupta & Charl Jooste, 2018. "Unconventional monetary policy shocks in OECD countries: how important is the extent of policy uncertainty?," International Economics and Economic Policy, Springer, vol. 15(3), pages 683-703, July.
    6. repec:eee:jmacro:v:60:y:2019:i:c:p:163-179 is not listed on IDEAS
    7. Matteo Barigozzi & Marc Hallin & Stefano Soccorsi, 2019. "Time-Varying General Dynamic Factor Models and the Measurement of Financial Connectedness," Working Papers 257939806, Lancaster University Management School, Economics Department.
    8. De Simone, Lisa & Piotroski, Joseph D. & Tomy, Rimmy E., 2017. "Repatriation Taxes and Foreign Cash Holdings: The Impact of Anticipated Tax Policy," Research Papers 3507, Stanford University, Graduate School of Business.
    9. Bańbura, Marta & Albani, Maria & Ambrocio, Gene & Bursian, Dirk & Buss, Ginters & de Winter, Jasper & Gavura, Miroslav & Giordano, Claire & Júlio, Paulo & Le Roux, Julien & Lozej, Matija & Malthe-Thag, 2018. "Business investment in EU countries," Occasional Paper Series 215, European Central Bank.
    10. Gigout, Timothee & Bricongne, Jean-Charles, 2019. "Explaining the Persistent Effect of Demand Uncertainty on Firm Growth," MPRA Paper 94228, University Library of Munich, Germany.
    11. Yanele Nyamela & Vasilios Plakandaras & Rangan Gupta, 2018. "Frequency-Dependent Real-Time Effects of Uncertainty in the United States: Evidence from Daily Data," Working Papers 201833, University of Pretoria, Department of Economics.
    12. repec:eee:eneeco:v:76:y:2018:i:c:p:115-126 is not listed on IDEAS

    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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