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The Impact of Uncertainty Shocks: Firm Level Estimation and a 9/11 Simulation

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Author Info
Nick Bloom

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Abstract

Uncertainty appears to vary strongly over time, temporarily rising by up to 200% aroundmajor shocks like the Cuban Missile crisis, the assassination of JFK and 9/11. This paperoffers the first structural framework to analyze uncertainty shocks. I build a model with atime varying second moment, which is numerically solved and estimated using firm leveldata. The parameterized model is then used to simulate a macro uncertainty shock, whichproduces a rapid drop and rebound in employment, investment and productivity, and amoderate loss in GDP. This temporary impact of a second moment shock is different from thetypically persistent impact of a first moment shock, highlighting the importance forpolicymakers of identifying their relative magnitudes in major shocks. The simulation of anuncertainty shock is then compared to actual 9/11 data, displaying a surprisingly good match.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0718.

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Date of creation: Mar 2006
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Handle: RePEc:cep:cepdps:dp0718

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Related research
Keywords: Labor; investment; uncertainty; real options;

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Find related papers by JEL classification:
D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Nick Bloom, 2007. "Uncertainty and the Dynamics of R&D," CEP Discussion Papers dp0792, Centre for Economic Performance, LSE. [Downloadable!]
    Other versions:
  2. Contreras, Juan, 2006. "An Empirical Model of Factor Adjustment Dynamics," MPRA Paper 9797, University Library of Munich, Germany. [Downloadable!]
  3. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Francois Gourio, 2007. "Disasters and Recoveries: A Note on the Barro-Rietz Explanation of the Equity Premium Puzzle," Boston University - Department of Economics - Working Papers Series WP2007-007, Boston University - Department of Economics. [Downloadable!]
  5. William Miles, 2009. "Irreversibility, Uncertainty and Housing Investment," The Journal of Real Estate Finance and Economics, Springer, vol. 38(2), pages 173-182, February. [Downloadable!] (restricted)
  6. Nick Bloom & John Van Reenen & Stephen Bond, 2006. "Uncertainty and Investment Dynamics," NBER Working Papers 12383, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Nicholas Bloom & Raffaella Sadun & John Van Reenen, 2007. "Americans Do I.T. Better: US Multinationals and the Productivity Miracle," NBER Working Papers 13085, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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