Creative Destruction and Uncertainty

50 Pages Posted: 1 Jun 2016

Date Written: May 2016

Abstract

Recessions are times of high uncertainty. But does uncertainty cause downturns or vice versa? This paper argues that counter-cyclical fluctuations in uncertainty are, to a large extent, a natural result of creative destruction. I show analytically how aggregate growth and firm-level uncertainty are linked when firms gradually adopt a leading technology: expansions of the technological frontier widen the dispersion of firm-level productivity shocks, a benchmark measure of uncertainty. In a model of endogenous firm dynamics a technological expansion spurs a creative destruction process generating a temporary downturn and rendering uncertainty counter-cyclical. These predictions are confirmed in U.S. data showing that creative destruction accounts for 20 to 40 percent of overall variation in firm-level uncertainty.

Keywords: Business Cycles, creative destruction, uncertainty

JEL Classification: D22, D80, E32

Suggested Citation

Sedlacek, Petr, Creative Destruction and Uncertainty (May 2016). CEPR Discussion Paper No. DP11296, Available at SSRN: https://ssrn.com/abstract=2786898

Petr Sedlacek (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

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