Using Disasters to Estimate the Impact of Uncertainty

40 Pages Posted: 18 May 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)

Stephen Terry

Boston University

Date Written: May 2020

Abstract

Uncertainty rises in recessions and falls in booms. But what is the causal relationship? We construct cross-country panel data on stock market levels and volatility and use natural disasters, terrorist attacks, and political shocks as instruments in regressions and VAR estimations. We find that increased volatility robustly lowers growth. We also structurally estimate a heterogeneous firms business cycle model with uncertainty and disasters and use this to analyze our empirical results. Finally, using our VAR results we estimate COVID-19 will reduce US GDP by 9% in 2020 based on the initial stock market returns and volatility response.

Suggested Citation

Baker, Scott R. and Bloom, Nicholas and Terry, Stephen, Using Disasters to Estimate the Impact of Uncertainty (May 2020). NBER Working Paper No. w27167, Available at SSRN: https://ssrn.com/abstract=3603797

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

Stephen Terry

Boston University ( email )

Here is the Coronavirus
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