Covid-Induced Economic Uncertainty

17 Pages Posted: 13 Apr 2020 Last revised: 24 Apr 2020

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)

Steven J. Davis

University of Chicago; National Bureau of Economic Research (NBER); Hoover Institution

Stephen Terry

Boston University

Date Written: April 2020

Abstract

Assessing the economic impact of the COVID-19 pandemic is essential for policymakers, but challenging because the crisis has unfolded with extreme speed. We identify three indicators – stock market volatility, newspaper-based economic uncertainty, and subjective uncertainty in business expectation surveys – that provide real-time forward-looking uncertainty measures. We use these indicators to document and quantify the enormous increase in economic uncertainty in the past several weeks. We also illustrate how these forward-looking measures can be used to assess the macroeconomic impact of the COVID-19 crisis. Specifically, we feed COVID-induced first-moment and uncertainty shocks into an estimated model of disaster effects developed by Baker, Bloom and Terry (2020). Our illustrative exercise implies a year-on-year contraction in U.S. real GDP of nearly 11 percent as of 2020 Q4, with a 90 percent confidence interval extending to a nearly 20 percent contraction. The exercise says that about half of the forecasted output contraction reflects a negative effect of COVID-induced uncertainty.

Suggested Citation

Baker, Scott R. and Bloom, Nicholas and Davis, Steven J. and Terry, Stephen, Covid-Induced Economic Uncertainty (April 2020). NBER Working Paper No. w26983, Available at SSRN: https://ssrn.com/abstract=3574447

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

Steven J. Davis

University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7312 (Phone)
773-702-0458 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Hoover Institution

434 Galvez Mall
Stanford University
Stanford, CA 94305-6010
United States
773 251 1795 (Phone)

Stephen Terry

Boston University ( email )

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