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The impact of uncertainty shocks: firm level estimation and a 9/11 simulation

Bloom, Nick (2006) The impact of uncertainty shocks: firm level estimation and a 9/11 simulation. CEPDP (718). London School of Economics and Political Science. Centre for Economic Performance, London, UK. ISBN 0753019442

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Uncertainty appears to vary strongly over time, temporarily rising by up to 200% around major shocks like the Cuban Missile crisis, the assassination of JFK and 9/11. This paper offers the first structural framework to analyze uncertainty shocks. I build a model with a time varying second moment, which is numerically solved and estimated using firm level data. The parameterized model is then used to simulate a macro uncertainty shock, which produces a rapid drop and rebound in employment, investment and productivity, and a moderate loss in GDP. This temporary impact of a second moment shock is different from the typically persistent impact of a first moment shock, highlighting the importance for policymakers of identifying their relative magnitudes in major shocks. The simulation of an uncertainty shock is then compared to actual 9/11 data, displaying a surprisingly good match.

Item Type: Monograph (Discussion Paper)
Official URL:
Additional Information: © 2006 Nick Bloom
Divisions: Centre for Economic Performance
Subjects: H Social Sciences > HB Economic Theory
JEL classification: C - Mathematical and Quantitative Methods > C2 - Econometric Methods: Single Equation Models; Single Variables > C23 - Models with Panel Data
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty
E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E22 - Capital; Investment (including Inventories); Capacity
D - Microeconomics > D9 - Intertemporal Choice and Growth > D92 - Intertemporal Firm Choice and Growth, Investment, or Financing
Date Deposited: 23 Jul 2008 11:42
Last Modified: 16 May 2024 11:39

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