Does uncertainty reduce growth? Using disasters as natural experiments

Baker, Scott R. and Bloom, Nicholas (2013) Does uncertainty reduce growth? Using disasters as natural experiments. CEP Discussion Papers (CEPDP1243). London School of Economics and Political Science. Centre for Economic Performance, London, UK.

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Abstract

A growing body of evidence suggests that uncertainty is counter cyclical, rising sharply in recessions and falling in booms. But what is the causal relationship between uncertainty and growth? To identify this we construct cross country panel data on stock market levels and volatility as proxies for the first and second moments of business conditions. We then use natural disasters, terrorist attacks and unexpected political shocks as instruments for our stock market proxies of first and second moment shocks. We find that both the first and second moments are highly significant in explaining GDP growth, with second moment shocks accounting for at least a half of the variation in growth. Variations in higher moments of stock market returns appear to have little impact on growth.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://cep.lse.ac.uk/_new/publications/discussion...
Additional Information:	© 2013 The Author(s)
Divisions:	LSE
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HB Economic Theory
JEL classification:	D - Microeconomics > D9 - Intertemporal Choice and Growth > D92 - Intertemporal Firm Choice and Growth, Investment, or Financing E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E22 - Capital; Investment (including Inventories); Capacity D - Microeconomics > D8 - Information, Knowledge, and Uncertainty C - Mathematical and Quantitative Methods > C2 - Econometric Methods: Single Equation Models; Single Variables > C23 - Models with Panel Data
Date Deposited:	26 Feb 2024 14:24
Last Modified:	14 Sep 2024 04:45
URI:	http://eprints.lse.ac.uk/id/eprint/121906

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