Uncertainty and growth disasters

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 gr...

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Bibliographic Details
Published in:Review of economic dynamics 2022-04, Vol.44, p.33-64
Main Authors: Jovanovic, Boyan, Ma, Sai
Format: Article
Language:English
Subjects:
Downside risk
Growth-at-risk
Uncertainty and growth
Volatility
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Summary: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. We build a model in which growth and uncertainty are both endogenous: rapid adoption of new technology raises economic uncertainty and may occasionally cause measured productivity to decline. The equilibrium growth distribution is negatively skewed and higher uncertainty leads to a thicker left tail.
ISSN:1094-2025
1096-6099
DOI:10.1016/j.red.2021.04.002