REALLY UNCERTAIN BUSINESS CYCLES
March 2014
Working Paper Number:
CES-14-18
Abstract
We propose uncertainty shocks as a new shock that drives business cycles. First, we demonstrate that microeconomic uncertainty is robustly countercyclical, rising sharply during recessions, particularly during the Great Recession of 2007-2009. Second, we quantify the impact of time-varying uncertainty on the economy in a dynamic stochastic general equilibrium model with heterogeneous firms. We find that reasonably calibrated uncertainty shocks can explain drops and rebounds in GDP of around 3%. Moreover, we show that increased uncertainty alters the relative impact of government policies, making them initially less effective and then subsequently more effective.
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macroeconomic,
recession,
autoregressive,
gdp,
regress,
shock
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Census of Manufactures,
Annual Survey of Manufactures,
Ordinary Least Squares,
Total Factor Productivity,
National Bureau of Economic Research,
Federal Reserve Bank,
Department of Economics,
IQR,
Center for Research in Security Prices,
Duke University,
World Trade Organization,
Stanford University
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