Duncan’s Economic Blog

Uncertainty & Recession

Posted in Uncategorized by duncanseconomicblog on August 10, 2011

The past few weeks have seen a vicious equity market sell off which now seems to have paused, huge swings in the European peripheral bond market and major falls in commodity markets (outside of gold) all accompanied by rising volatility.

It seems fair to conclude that uncertainty has risen and that this will probably impact on firms’ investment decisions and consumers’ spending patterns.

Drawing on work by Ben Bernanke (from a long forgotten 1983 paper) Nicolas Bloom  (assistant professor of economics at Stanford) has a succinct and highly recommended post up at Vox, which aims to forecast how this increase in uncertainty will impact the economy.

He concludes: 

Based on my research, I predict another short, sharp contraction in late 2011 of about 1%, with a rebound in spring 2012. This research looks at the average impact of the previous 16 uncertainty shocks to predict the impact of future shocks. Typically these leads to reductions of growth of about 2% immediately after the shock, with a recovery about six months later once uncertainty subsides.

(With a hat-tip to regular commentator Luis Enrique)


5 Responses

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  1. Dave Holden said, on August 10, 2011 at 10:30 am

    “Drawing on work by Ben Bernanke ”

    Yeh, credibility problem right there.

  2. jomiku said, on August 10, 2011 at 1:15 pm

    Not to argue – because I love your blog – but his model treats stock market volatility as a proxy for general uncertainty and then of a kind that marks a recessionary shift. That may be true. It seems as if it’s true on average, but that doesn’t mean more than a decent correlation*. I’m not sure the model really applies here because we are in a liquidity trap, because the nature of the shock is arguable – is this endogenous or exogenous when it’s the government itself? – because this kind of uncertainty moment may have a different meaning in the context of 2+ years with interest rates at 0. That doesn’t mean I’m looking for continued expansion. I’m more in the camp that things will get worse, though I’m hoping to be wrong.

    BTW, if you read the Fed’s note, we’ll be looking at over 4 years of 0 rates. Still people will refuse to recognize that Keynes was correct.

    *BTW, I have a mental block about spelling the word “correlation” with two r’s. Auto-correct does it for me. Not having an OED subscription, I look up the derivation and find a bunch of silly stuff: that it’s from cum relate, which implies the double r is a typo, or that it’s somehow the Latin word for together. If late Latin used a word like “cor” for together, that really is a big change from the classical Latin I learned.

    • duncanseconomicblog said, on August 10, 2011 at 1:22 pm

      Thanks – I enjoy your comments.

      I’m not entirely convinced by the model and I’m suspicious of attempts to exactly forecast a short, sharp recession and then a rebound – especially using the VIX as a proxy.

      But it’s interesting – and I do like any model that takes uncertainty so seriously.

      Yep – the Fed statement was very interesting, will blog about outlook later in week.


  3. […] we like to think.” It doesn’t appear to take much to dip fragile recoveries back into recession, or at least financial panic. It doesn’t appear much incentive is needed to engage in […]

  4. Riots and budgetary austerity said, on August 12, 2011 at 2:37 pm

    […] about the importance of family values and individual responsibility. ____________________ [1] https://duncanseconomicblog.wordpress.com/2011/08/10/uncertainty-recession/ [2] See http://www.voxeu.org/index.php?q=node/6846 [3] See […]

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