The Finance Uncertainty Multiplier

62 Pages Posted: 7 May 2018

See all articles by Iván Alfaro

Iván Alfaro

BI Norwegian Business School

Nicholas Bloom

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

Xiaoji Lin

University of Minnesota

Multiple version iconThere are 2 versions of this paper

Date Written: May 2018

Abstract

We show how real and financial frictions amplify the impact of uncertainty shocks. We build a model with real frictions, and find adding financial frictions roughly doubles the impact of uncertainty shocks. Higher uncertainty alongside financial frictions induces the standard real-options effects on investment and hiring, but also leads firms to hoard cash, further reducing investment and hiring. We then test the model using a panel of US firms and a novel instrumentation strategy for uncertainty exploiting differential firm exposure to exchange rate and price volatility. These results highlight why in periods with greater financial frictions uncertainty can be particularly damaging.

Suggested Citation

Alfaro, Iván and Bloom, Nicholas and Lin, Xiaoji, The Finance Uncertainty Multiplier (May 2018). NBER Working Paper No. w24571, Available at SSRN: https://ssrn.com/abstract=3174503

Iván Alfaro (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

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

Xiaoji Lin

University of Minnesota ( email )

420 Delaware St. SE
Minneapolis, MN 55455
United States

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