Using Disasters to Estimate the Impact of Uncertainty
Uncertainty rises in recessions and falls in booms. But what is the causal relationship? We construct cross-country panel data on stock market returns to proxy for first- and second-moment shocks and instrument these with natural disasters, terrorist attacks, and political shocks. Our IV regression results reveal a robust negative short-term impact of second moments (uncertainty) on growth. Employing multiple VAR estimation approaches, relying on a range of identifying assumptions, also reveals a negative impact of uncertainty on growth. Finally, we show that these results are reproducible in a conventional micro-macro business cycle model with time-varying uncertainty.
Published Versions
Scott R Baker & Nicholas Bloom & Stephen J Terry, 2024. "Using Disasters to Estimate the Impact of Uncertainty," Review of Economic Studies, vol 91(2), pages 720-747. citation courtesy of 
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