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The Impact of Uncertainty Shocks
Nicholas Bloom,Nicholas Bloom +1 more
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TLDR
In this paper, a model with a time varying second moment was proposed to simulate a macro uncertainty shock, which produces a rapid drop and rebound in aggregate output and employment, and showed a good match in both magnitude and timing.Abstract:
Uncertainty appears to jump up after major shocks like the Cuban Missile crisis, the assassination of JFK, the OPEC I oil-price shock and the 9/11 terrorist attack. This paper offers a structural framework to analyze the impact of these uncertainty shocks. I build a model with a time varying second moment, which is numerically solved and estimated using firm level data. The parameterized model is then used to simulate a macro uncertainty shock, which produces a rapid drop and rebound in aggregate output and employment. This occurs because higher uncertainty causes firms to temporarily pause their investment and hiring. Productivity growth also falls because this pause in activity freezes reallocation across units. In the medium term the increased volatility from the shock induces an overshoot in output, employment and productivity. Thus, second moment shocks generate short sharp recessions and recoveries. This simulated impact of an uncertainty shock is compared to VAR estimations on actual data, showing a good match in both magnitude and timing. The paper also jointly estimates labor and capital convex and non-convex adjustment costs. Ignoring capital adjustment costs is shown to lead to substantial bias while ignoring labor adjustment costs does not.read more
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Uncertainty about Government Policy and Stock Prices
TL;DR: This paper analyzed how changes in government policy affect stock prices and found that stock prices should fall at the announcements of policy changes, on average, if uncertainty about government policy is large, and also if the policy change is preceded by a short or shallow economic downturn.
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Policy Uncertainty and Corporate Investment
Huseyin Gulen,Mihai Ion +1 more
TL;DR: In this paper, a strong negative relationship between firm-level capital investment and the aggregate level of uncertainty associated with future policy and regulatory outcomes is found, and the relation between policy uncertainty and capital investment is not uniform in the cross section, being significantly stronger for firms with a higher degree of investment irreversibility and for firms more dependent on government spending.
Posted Content
Uncertainty and Investment Dynamics
TL;DR: This article showed that higher uncertainty reduces the impact of demand shocks on investment, and that firms are more cautious when investing or disinvesting when dealing with high uncertainty, such as after major shocks like OPEC I and 9/11.
Journal ArticleDOI
Measuring Economic Policy Uncertainty
Scott R. Baker,Nicholas Bloom,Nicholas Bloom,Steven J. Davis,Steven J. Davis,Steven J. Davis +5 more
TL;DR: The authors developed a new index of economic policy uncertainty (EPU), built on three components: the frequency of newspaper references to economic policy uncertainties, the number of federal tax code provisions set to expire, and the extent of forecaster disagreement over future inflation and government purchases.
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Fluctuations in Uncertainty
TL;DR: The authors found that both macro and micro uncertainty appears to rise sharply in recessions and the types of exogenous shocks like wars, financial panics and oil price jumps that cause recessions appear to directly increase uncertainty, and uncertainty also appears to endogenously rise further during recessions.
References
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Book
Investment Under Uncertainty
Avinash Dixit,Robert S. Pindyck +1 more
TL;DR: In this article, Dixit and Pindyck provide the first detailed exposition of a new theoretical approach to the capital investment decisions of firms, stressing the irreversibility of most investment decisions, and the ongoing uncertainty of the economic environment in which these decisions are made.
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Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy
TL;DR: In this article, the authors present a model embodying moderate amounts of nominal rigidities that accounts for the observed inertia in inflation and persistence in output, and the key features of their model are those that prevent a sharp rise in marginal costs after an expansionary shock to monetary policy.
Book
Recursive methods in economic dynamics
TL;DR: In this article, a deterministic model of optimal growth is proposed, and a stochastic model is proposed for optimal growth with linear utility and linear systems and linear approximations.
Journal ArticleDOI
Tobin's Marginal q and Average q : A Neoclassical Interpretation
TL;DR: In this paper, the optimal rate of investment as a function of marginal q adjusted for tax parameters is derived from data on average q assuming the actual U.S. tax system concerning corporate tax rate and depreciation allowances.
Book
Numerical methods in economics
TL;DR: In this article, the authors present techniques from the numerical analysis and applied mathematics literatures and show how to use them in economic analyses, including linear equations, iterative methods, optimization, nonlinear equations, approximation methods, numerical integration and differentiation, and Monte Carlo methods.