Uncertainty and Growth Disasters
53 Pages Posted: 2 Nov 2020 Last revised: 28 Jul 2024
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Uncertainty and Growth Disasters
Date Written: October 2020
Abstract
This paper documents several facts on the real effects of economic uncertainty. First, higher uncertainty is associated with a more dispersed distribution of output growth. Second, the relation is highly asymmetric: A rise in uncertainty is associated with a sharp decline in the lower tail of the growth distribution whereas it has a much smaller and insignificant impact on its upper tail. Third, the negative response of growth to uncertainty shocks is larger when the equity market is more volatile. We build a model in which growth and uncertainty are both endogenous: rapid adoption of new technology raises economic uncertainty and may cause measured productivity to decline. The equilibrium growth distribution is negatively skewed and higher uncertainty leads to a thicker left tail and to more labor reallocation among jobs and among
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