Really Uncertain Business Cycles

55 Pages Posted: 12 Apr 2014

See all articles by Nicholas Bloom

Nicholas Bloom

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Max Floetotto

Stanford University

Nir Jaimovich

University of Zurich

Itay Saporta Eksten

Tel Aviv University - Eitan Berglas School of Economics; University College London - Department of Economics

Stephen Terry

Boston University; National Bureau of Economic Research

Multiple version iconThere are 2 versions of this paper

Date Written: March 01, 2014

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 timevarying 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.

Keywords: uncertainty, adjustment costs, business cycles

JEL Classification: D92, E22, D8, C23

Suggested Citation

Bloom, Nicholas and Floetotto, Max and Jaimovich, Nir and Saporta Eksten, Itay and Terry, Stephen, Really Uncertain Business Cycles (March 01, 2014). US Census Bureau Center for Economic Studies Paper No. CES-WP-14-18, Available at SSRN: https://ssrn.com/abstract=2423516 or http://dx.doi.org/10.2139/ssrn.2423516

Nicholas Bloom (Contact Author)

Stanford University - Department of Economics ( email )

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HOME PAGE: http://economics.stanford.edu/faculty/bloom

National Bureau of Economic Research (NBER) ( email )

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Max Floetotto

Stanford University ( email )

Stanford, CA 94305
United States

HOME PAGE: http://www.stanford.edu/~maxf

Nir Jaimovich

University of Zurich ( email )

Itay Saporta Eksten

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel

HOME PAGE: http://www.tau.ac.il/~itaysap/

University College London - Department of Economics ( email )

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London WC1E 6BT, WC1E 6BT
United Kingdom

Stephen Terry

Boston University ( email )

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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