The relationship between aggregate uncertainty and firm-level uncertainty

Many firm-level studies use aggregate uncertainty to proxy for firm-level uncertainty. Providing support for this strategy, we analyse the extent to which firm-level uncertainty is affected by aggregate uncertainty. Firm-level uncertainty is constructed from a large and monthly panel dataset of manufacturing firms. We find that aggregate uncertainty is associated positively and robustly with firm-level uncertainty. This correlation holds across different types of domestic and international measures of aggregate uncertainty. However, the extent of the correlations is heterogeneous and depends on certain firm characteristics and the state of the business cycle. For example, the widely used economic policy uncertainty index matters to all firms’ uncertainty only in recessionary periods, while it is relevant over the entire business cycle only to large firms’ uncertainty.