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Really uncertain business cycles


Bloom, Nicholas; Floetotto, Max; Jaimovich, Nir; Saporta-Eksten, Itay; Terry, Stephen J (2018). Really uncertain business cycles. Econometrica, 86(3):1031-1065.

Abstract

We investigate the role of uncertainty in business cycles. First, we demonstrate that microeconomic uncertainty rises sharply during recessions, including during the Great Recession of 2007–2009. Second, we show that uncertainty shocks can generate drops in gross domestic product of around 2.5% in a dynamic stochastic general equilibrium model with heterogeneous firms. However, we also find that uncertainty shocks need to be supplemented by first‐moment shocks to fit consumption over the cycle. So our data and simulations suggest recessions are best modelled as being driven by shocks with a negative first moment and a positive second moment. Finally, we show that increased uncertainty can make first‐moment policies, like wage subsidies, temporarily less effective because firms become more cautious in responding to price changes.

Abstract

We investigate the role of uncertainty in business cycles. First, we demonstrate that microeconomic uncertainty rises sharply during recessions, including during the Great Recession of 2007–2009. Second, we show that uncertainty shocks can generate drops in gross domestic product of around 2.5% in a dynamic stochastic general equilibrium model with heterogeneous firms. However, we also find that uncertainty shocks need to be supplemented by first‐moment shocks to fit consumption over the cycle. So our data and simulations suggest recessions are best modelled as being driven by shocks with a negative first moment and a positive second moment. Finally, we show that increased uncertainty can make first‐moment policies, like wage subsidies, temporarily less effective because firms become more cautious in responding to price changes.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Uncontrolled Keywords:Uncertainty, adjustment costs, business cycles
Language:English
Date:May 2018
Deposited On:12 Jun 2018 11:38
Last Modified:06 Oct 2019 05:52
Publisher:Wiley-Blackwell Publishing, Inc.
ISSN:0012-9682
OA Status:Green
Publisher DOI:https://doi.org/10.3982/ECTA10927
Official URL:https://onlinelibrary.wiley.com/doi/abs/10.3982/ECTA10927

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