Professor of Economics
Friday, April 26, 2013
We propose uncertainty shocks as a new shock that drives business cycles. First, we demonstrate that microeconomic uncertainty is robustly countercyclical, rising sharply during recessions, particularly during the Great Recession of 2007-2009. Second, we quantify the impact of time-varying uncertainty on the economy in a dynamic stochastic general equilibrium model with heterogeneous firms. We find that reasonably calibrated uncertainty shocks can explain drops and rebounds in GDP of around 3%. Moreover, we show that increased uncertainty alters the relative impact of government policies, making them initially less effective and then subsequently more effective.
Nicholas Bloom is professor of economics at Stanford University. A young star in the field, he has already made multiple important contributions. Through empirical work, including experimental fieldwork, he has shown that a substantial portion of the productivity gap between rich and poor countries can be explained by the use of inferior management practices in poor countries. He has also examined technological innovation and spillovers. On the theoretical side, he has improved our understanding of how uncertainty in situations like 9-11 or the financial crisis can lead to sharp recessions. In 2010, he won the Frisch Medal for his research on macroeconomic uncertainty.