Abstract
Uncertainty rises in recessions and falls in booms. But what is the causal relationship? We construct cross-country panel data on stock market returns to proxy for first- and second-moment shocks and instrument these with natural disasters, terrorist attacks, and political shocks. Our IV regression results reveal a robust negative short-term impact of second moments (uncertainty) on growth. Employing multiple vector autoregression estimation approaches, relying on a range of identifying assumptions, also reveals a negative impact of uncertainty on growth. Finally, we show that these results are reproducible in a conventional micro-macro business cycle model with time-varying uncertainty.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 720-747 |
| Number of pages | 28 |
| Journal | Review of Economic Studies |
| Volume | 91 |
| Issue number | 2 |
| DOIs | |
| State | Published - Mar 1 2024 |
Funding
We would like to thank the National Science Foundation, the Sloan Foundation, and the Hariri Institute for Computing for their financial support. We appreciated feedback from discussants Jonathan Goldberg, Ayhan Kose, Aart Kray, and Tarek Hassan as well as seminar participants at the American Economic Associations, Chicago, Harvard, Maryland, IMF, NBER, Princeton, Stanford Institute for Theoretical Economics, Stanford, Texas, Paris School of Economics, the World Bank, the Royal Economic Society meetings, and the NY Fed. This paper builds on an unpublished 2013 paper “Does Uncertainty Reduce Growth? Using Disasters as Natural Experiments” by Baker and Bloom. We would like to thank the National Science Foundation, the Sloan Foundation, and the Hariri Institute for Computing for their financial support.We appreciated feedback from discussants Jonathan Goldberg, Ayhan Kose, Aart Kray, and Tarek Hassan as well as seminar participants at the American Economic Associations, Chicago, Harvard, Maryland, IMF, NBER, Princeton, Stanford Institute for Theoretical Economics, Stanford, Texas, Paris School of Economics, the World Bank, the Royal Economic Society meetings, and the NY Fed. This paper builds on an unpublished 2013 paper "Does Uncertainty Reduce Growth? Using Disasters as Natural Experiments" by Baker and Bloom.
Keywords
- Growth
- Natural disasters
- Political shocks
- Uncertainty
ASJC Scopus subject areas
- Economics and Econometrics
