Does Uncertainty Reduce Growth? Using Disasters as Natural Experiments

34 Pages Posted: 28 Sep 2013 Last revised: 8 Oct 2014

See all articles by Scott R. Baker

Scott R. Baker

Northwestern University, Kellogg School of Management, Department of Finance

Nicholas Bloom

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: September 2013

Abstract

A growing body of evidence suggests that uncertainty is counter cyclical, rising sharply in recessions and falling in booms. But what is the causal relationship between uncertainty and growth? To identify this we construct cross country panel data on stock market levels and volatility as proxies for the first and second moments of business conditions. We then use natural disasters, terrorist attacks and unexpected political shocks as instruments for our stock market proxies of first and second moment shocks. We find that both the first and second moments are highly significant in explaining GDP growth, with second moment shocks accounting for at least a half of the variation in growth. Variations in higher moments of stock market returns appear to have little impact on growth.

Suggested Citation

Baker, Scott R. and Bloom, Nicholas, Does Uncertainty Reduce Growth? Using Disasters as Natural Experiments (September 2013). NBER Working Paper No. w19475, Available at SSRN: https://ssrn.com/abstract=2332546

Scott R. Baker (Contact Author)

Northwestern University, Kellogg School of Management, Department of Finance ( email )

Evanston, IL 60208
United States

Nicholas Bloom

Stanford University - Department of Economics ( email )

Landau Economics Building, Room 231
579 Serra Mall
Stanford, CA 94305-6072
United States
650-725-7836 (Phone)

HOME PAGE: http://economics.stanford.edu/faculty/bloom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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