Does Uncertainty Reduce Growth? Using Disasters as Natural Experiments

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: A growing body of evidence suggests that uncertainty is counter cyclical, rising sharply in recessions and falling in booms. But what is the causal relationship between uncertainty and growth? To identify this we construct cross country panel data on stock market levels and volatility as proxies for the first and second moments of business conditions. We then use natural disasters, terrorist attacks and unexpected political shocks as instruments for our stock market proxies of first and second moment shocks. We find that both the first and second moments are highly significant in explaining GDP growth, with second moment shocks accounting for at least a half of the variation in growth. Variations in higher moments of stock market returns appear to have little impact on growth.

Keywords: Uncertainty; natural disasters; political shocks; growth (search for similar items in EconPapers)
JEL-codes: C23 D8 D92 E22 (search for similar items in EconPapers)
Date: 2013-10
New Economics Papers: this item is included in nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (181)

Downloads: (external link)
https://cep.lse.ac.uk/pubs/download/dp1243.pdf (application/pdf)

Related works:
Working Paper: Does uncertainty reduce growth? Using disasters as natural experiments (2013)
Working Paper: Does Uncertainty Reduce Growth? Using Disasters as Natural Experiments (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cep:cepdps:dp1243

Access Statistics for this paper

More papers in CEP Discussion Papers from Centre for Economic Performance, LSE
Bibliographic data for series maintained by ().