Bloom, Nick (2009) The impact of uncertainty shocks. Econometrica, 77 (3). pp. 623-685. ISSN 0012-9682
Full text not available from this repository.Abstract
Uncertainty appears to jump up after major shocks like the Cuban Missile crisis, the assassination of JFK, the OPEC I oil-price shock, and the 9/11 terrorist attacks. This paper offers a structural framework to analyze the impact of these 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 aggregate output and employment. This occurs because higher uncertainty causes firms to temporarily pause their investment and hiring. Productivity growth also falls because this pause in activity freezes reallocation across units. In the medium term the increased volatility from the shock induces an overshoot in output, employment, and productivity. Thus, uncertainty shocks generate short sharp recessions and recoveries. This simulated impact of an uncertainty shock is compared to vector autoregression estimations on actual data, showing a good match in both magnitude and timing. The paper also jointly estimates labor and capital adjustment costs (both convex and nonconvex). Ignoring capital adjustment costs is shown to lead to substantial bias, while ignoring labor adjustment costs does not.
| Item Type: | Article |
|---|---|
| Official URL: | http://onlinelibrary.wiley.com/journal/10.1111/(IS... |
| Additional Information: | © 2009 Wiley-Blackwell |
| Divisions: | Centre for Economic Performance |
| Subjects: | H Social Sciences > HB Economic Theory |
| Date Deposited: | 07 Dec 2010 13:20 |
| Last Modified: | 19 Nov 2024 23:00 |
| URI: | http://eprints.lse.ac.uk/id/eprint/30595 |
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