Recessions are times of high uncertainty. But does uncertainty cause downturns or vice versa? And what are the long-run aggregate effects of uncertainty fluctuations? Using a structural model of creative destruction, I argue that counter-cyclical uncertainty is partly an epiphenomenon of growth. Because of gradual technology adoption, expansions of the technological frontier widen the dispersion of firm-level productivity shocks, a popular measure of uncertainty. I find support for these, and other, model predictions in the data. Implied growth-driven uncertainty displays recessionary spikes and accounts for about half of the observed uncertainty variation. Uncertainty in the Great Recession was not growth-driven.

Creative destruction and uncertainty over the business cycle

Fri 11 Mar 2016 3:30pm5:00pm


Room 103, Colin Clark Building (#39)