Discussion ofBloom, Floetotto, Jaimovich,

“Really Uncertain Business Cycles”

Conference on Inequality in a Time of ContractionStanford UniversityNovember 13, 2009

Eric T. SwansonFederal Reserve Bank of San Francisco

Note: The views expressed in this presentation are the author’s and do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or any other individuals within the Federal Reserve System.

Uncertainty and Business Cycles

Ben Bernanke (1983 QJE)

Christina Romer (1990 QJE)

John Hassler (1996 JEDC)

Nicholas Bloom (2009 Em)

Uncertainty Delay in Inv,Durable C

Recession

Uncertainty Shocks

The Model:

At

Att

At AA 11loglog

zit

ztti

zit zz 11,loglog

),( ititittit lkfzAy

Uncertainty Shocks

The Model:

At

Att

At AA 11loglog

),( ititittit lkfzAy

23

45

6Fo

reca

st s

tand

ard-

devi

atio

n, fr

om G

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el

1970 1980 1990 2000 2010Year

Figure 10b: GARCH(1,1) for TFP

1020

3040

5060

Sto

ck m

arke

t im

plie

d/ac

tual

vol

atili

ty

1965 1970 1975 1980 1985 1990 1995 2000 2005Year

Figure 11: Stock Market Volatility

realized volatility implied volatility

.16

.18

.2.2

2.2

4IQ

R o

f TV

S g

row

th ra

te, 2

5 pe

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+ es

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ean

0.2

.4.6

.81

rece

ssio

n/lo

w

1970 1980 1990 2000 2010Year of data

Figure 3: Cross-establishment output growth spread, within individual firms

Heterogeneity vs. Uncertainty

itittiit Xy

.16

.18

.2.2

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1970 1980 1990 2000 2010Year of data

Figure 3: Cross-establishment output growth spread, within individual firms

Davis, Haltiwanger, Jarmin, Miranda (2006)

Davis, Haltiwanger, Jarmin, Miranda (2006)

Davis, Haltiwanger, Jarmin, Miranda (2006)

Meghir and Pistaferri (2004)

Meghir and Pistaferri (2004)

“The counter-cyclicality of income uncertainty has been advocated by those who propose a resolution of the equity premium puzzle based on the negative correlation between aggregate shocks and individual risk (Mankiw (1986)). We find mixed support for this.”

p. 10

Implied Volatility: Stocks

0

20

40

60

80

100

annu

alize

d st

anda

rd d

evia

tion

(log

perc

ent)

implied volatility (VIX)

realized volatility(30-day trailing, S&P 500)

Realized Volatility: Stocks

0

10

20

30

40

50

60

70

80

annu

alize

d st

anda

rd d

evia

tion

(log

perc

ent)

Implied Volatility: Bonds

0

50

100

150

200

250

300

annu

alize

d st

anda

rd d

evia

tion

(bas

is po

ints

)

realized volatility(30-day trailing, 10-yr Tsy)

implied volatility (MOVE)

Realized Volatility: Bonds

0

50

100

150

200

250

300

350

400

450

500

annu

alize

d st

anda

rd d

evia

tion

(bas

is po

ints

)

Implied Volatility: Federal Funds Rate

0

20

40

60

80

100

120

sem

i-ann

ualiz

ed st

anda

rd d

evia

tion

(bas

is po

ints

)

implied volatility(ED options)

0

50

100

150

200

250

300

350

400

450

1-Ja

n-71

1-Ja

n-72

1-Ja

n-73

1-Ja

n-74

1-Ja

n-75

1-Ja

n-76

1-Ja

n-77

1-Ja

n-78

1-Ja

n-79

1-Ja

n-80

1-Ja

n-81

1-Ja

n-82

1-Ja

n-83

1-Ja

n-84

1-Ja

n-85

1-Ja

n-86

1-Ja

n-87

1-Ja

n-88

1-Ja

n-89

1-Ja

n-90

1-Ja

n-91

1-Ja

n-92

1-Ja

n-93

1-Ja

n-94

1-Ja

n-95

1-Ja

n-96

1-Ja

n-97

1-Ja

n-98

1-Ja

n-99

1-Ja

n-00

1-Ja

n-01

1-Ja

n-02

1-Ja

n-03

1-Ja

n-04

1-Ja

n-05

1-Ja

n-06

1-Ja

n-07

1-Ja

n-08

1-Ja

n-09

sem

i-ann

ualiz

ed st

anda

rd d

evia

tion

(bas

is po

ints

)Realized Volatility: Short-Term Rates

Realized Volatility: Oil Prices

0

20

40

60

80

100

120

140

160

180

200

annu

alize

d st

anda

rd d

evia

tion

(log

perc

ent)

Exogenous vs. Endogenous Uncertainty

Exogenous uncertainty:

ttt

tttt Xy

1

Endogenous uncertainty:

tttt XXy

Quantity vs. Price of Uncertainty/Risk

Risk premium = Quantity of risk × Price of risk

Bloom (2009): risk-neutral firms

This paper: firms evaluate investment using SDF

So the price of risk is as important as the quantity of risk in this paper.

Another reason to focus on financial market data

Summary of Comments & Suggestions

• De-emphasize cross-sectional measures of dispersion

• Emphasize GARCH, financial measures of uncertainty

• Emphasize model

• Confront issue of endogenous vs. exogenous uncertainty

Uncertainty Shocks

“Back in June 2008 I wrote a piece for VOXEU predicting a mild recession in 2009. Over the last few weeks the situation has become far worse, and I believe even these pessimistic predictions were too optimistic. I now believe Europe and the US will sink into a severe recession next year, with GDP contracting by 3% in 2009 and unemployment rising by about 3 million in both Europe and the US. This would be the worst recession since 1974/75.”

Nick Bloom, October 2008, VoxEU