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Really Uncertain Business Cycles

Bloom, N; Floetotto, M; Jaimovich, N; Saporta-Eksten, I; Terry, SJ; (2018) Really Uncertain Business Cycles. Econometrica , 86 (3) pp. 1031-1065. 10.3982/ECTA10927. Green open access

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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.

Type: Article
Title: Really Uncertain Business Cycles
Open access status: An open access version is available from UCL Discovery
DOI: 10.3982/ECTA10927
Publisher version: https://doi.org/10.3982/ECTA10927
Language: English
Additional information: This version is the version of record. For information on re-use, please refer to the publisher’s terms and conditions.
Keywords: Social Sciences, Science & Technology, Physical Sciences, Economics, Mathematics, Interdisciplinary Applications, Social Sciences, Mathematical Methods, Statistics & Probability, Business & Economics, Mathematics, Mathematical Methods In Social Sciences, Uncertainty, adjustment costs, business cycles, INVESTMENT DYNAMICS, IRREVERSIBLE INVESTMENT, AGGREGATE FLUCTUATIONS, IDIOSYNCRATIC RISK, VOLATILITY SHOCKS, INDIVISIBLE LABOR, LUMPY INVESTMENT, ADJUSTMENT COSTS, EQUILIBRIUM, MODEL
UCL classification: UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of SandHS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/10077906
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