Using disasters to estimate the impact of uncertainty
Scott R. Baker, Nicholas Bloom and Stephen Terry
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.
1 March 2024
The Review of Economic Studies 91(2) , pp.720-747, 2024
https://academic.oup.com/restud/article/91/2/720/7084582
This Journal article is published under the centre's Growth programme.