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.
Scott R. Baker, Nicholas Bloom and Stephen Terry
1 March 2024
The Review of Economic Studies 91(2) , pp.720-747, 2024
DOI: 10.1093/restud/rdad056
https://academic.oup.com/restud/article/91/2/720/7084582
This work is published under POID and the CEP's Growth programme.