We show how real and financial frictions amplify, prolong and propagate thenegative impact of uncertainty shocks. We first use a novel instrumentation strategy toaddress endogeneity in estimating the impact of uncertainty by exploiting differentialfirm exposure to exchange rate, policy, and energy price volatility in a panel of USfirms. Using common proxies for financial constraints we show that ex-ante financiallyconstrained firms cut their investment even more than unconstrained firms following anuncertainty shock. We then build a general equilibrium heterogeneous firms model withreal and financial frictions, finding financial frictions: i)amplifyuncertainty shocks bydoubling their impact on output; ii) increasepersistenceby extending the duration ofthe drop by 50%; and iii)propagateuncertainty shocks by spreading their impact ontofinancial variables. These results highlight why in periods of greater financial frictionsuncertainty can be particularly damaging.
Alfaro, Iván; Lin, Xiaoji & Bloom, Nicholas (2020)
The Finance Uncertainty Multiplier
[Academic lecture]. SFS Cavalcade North America 2020.
Alfaro, Iván & Park, Hoonsuk (2020)
Firm Uncertainty and Household Spending
[Academic lecture]. Oslo Macro Workshop 2020.
Alfaro, Iván & Park, Hoonsuk (2020)
Firm Uncertainty and Household Spending
[Academic lecture]. European Finance Association (EFA) Annual Meeting 2020,.
Alfaro, Iván & Park, Hoonsuk (2020)
Firm Uncertainty and Household Spending
[Academic lecture]. Centre for Economic Policy Research 2020 Conference on New Consumption Data.
Alfaro, Iván & Park, Hoonsuk (2020)
Firm Uncertainty and Household Spending
[Academic lecture]. The Ohio State University 2020 Alumni Finance Conference.
Alfaro, Iván & Park, Hoonsuk (2020)
Firm Uncertainty and Household Spending
[Academic lecture]. Midwest Finance Association (MFA) Annual Meeting 2020.
Alfaro, Iván & Park, Hoonsuk (2020)
Firm Uncertainty and Household Spending
[Academic lecture]. HEC Paris 2020 Spring Finance Conference.