Uncertainty and Economic Activity: Evidence from Business Survey Data

Abstract

What is the impact of time-varying uncertainty on aggregate economic activity? Using business survey data from the U.S. and Germany in structural vector autoregressions, we find that positive innovations to business uncertainty lead robustly to very prolonged declines in economic activity. In contrast, their high frequency impact is small. We thus find no evidence of the high-frequency wait-and-see effect -large declines of economic activity on impact and fast rebounds -that the recent literature associates with positive innovations to uncertainty. Rather, positive innovations to business uncertainty have similar effects as negative innovations to business confidence. Once we control for its low frequency impact, we find no statistically or economically significant effect of uncertainty innovations on aggregate activity.JEL Codes: E30, E32, E37.

Uncertainty and the Great Recession

“…(), (ii) the financial uncertainty proxy proposed by Ludvigson et al . (), (iii) stock market volatility, (iv) corporate bond spreads, (v) a survey‐based measure using the dispersion of firms’ forecasts about the general business outlook as a measure of (firm‐specific) idiosyncratic uncertainty (Bachmann et al ., ,b), and (vi) the economic policy uncertainty index of Baker et al . ()…”

“…Employing a wide range of uncertainty proxies has the advantage of capturing different kinds of uncertainty, such as among others (aggregate) macroeconomic uncertainty (Jurado, Ludvigson and Ng, ), financial uncertainty (Ludvigson, Ma and Ng, ), (idiosyncratic) firm‐specific uncertainty (Bachmann et al ., ; Bachmann, Elstner and Sims, b), and economic policy uncertainty (Baker et al ., ). At the same time these measures are constructed using very different approaches, e.g.…”

Global Engagement and Returns Volatility

“…This approach is problematic for several reasons: (i) it assumes that volatility is constant within the estimation window, a feature which is inconsistent with the extensive literature documenting the salient variation of volatility across time (see e.g. Schwert, ; Campbell et al ., ; Bloom, ); (ii) measured volatility is also highly sensitive to the breadth of the rolling window used in the estimation (Comin and Philippon, ); and critically, (iii) this method underestimates volatility when, as is often the case, episodes of high volatility are short‐lived (Bachmann, Elstner and Sims, ). We overcome these limitations by constructing the volatility of returns using daily data and estimating a dynamic panel fixed effects model of the determinants of volatility at a monthly frequency.…”

The lessons Quebec offers to Greece and Europe

“…This figure also shows how critical the cost of money in the private sector is for the recovery of the economy, a point made also in Mitsopoulos (), by depicting the positive correlation between interest rates and the uncertainty they reflect. The significant impact of uncertainty on economic activity is now increasingly documented, as in Bachmann, Elstner, and Sims (), The Economist (, ), and European Commission ().…”