The Finance Uncertainty Multiplier

74 Pages Posted: 7 May 2018 Last revised: 28 Dec 2022

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


We show how real and financial frictions amplify, prolong and propagate the negative impact of uncertainty shocks. We first use a novel instrumentation strategy to address endogeneity in estimating the impact of uncertainty by exploiting differential firm exposure to exchange rate, policy, and energy price volatility in a panel of US firms. Using common proxies for financial constraints we show that ex-ante financially constrained firms cut their investment even more than unconstrained firms following an uncertainty shock. We then build a general equilibrium heterogeneous firms model with real and financial frictions, finding financial frictions: i) amplify uncertainty shocks by doubling their impact on output; ii) increase persistence by extending the duration of the drop by 50%; and iii) propagate uncertainty shocks by spreading their impact onto financial variables. These results highlight why in periods of 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:

Iván Alfaro (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442

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)


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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