In the article by Nicholas Bloom, economic uncertainty is described as a concept that exists on all the levels of economic events, experienced by all the players concerned, and can be caused by non-economic reasons. The author answers four questions about uncertainty by reviewing an amount of then-recent research on the topic and analyzing the behavior of the market.
The first question is devoted to uncertainty itself, its features and facts. Bloom points out that the uncertainty he is discussing is, in fact, risk and uncertainty entwined, the first of which describes the predictable desired and undesired possibilities while the second presupposes complete unpredictability (154).
According to Bloom, the macro uncertainty increases during recessions as a result of leverage (firms taking increased loans), risk aversion and the following increase in the options price, the diversity of forecasts and the personal uncertainty of the forecasters, as well as the tension caused by the media. Micro uncertainty behaves similarly on industry, plant, and product level all over the world even though there is a degree of vagueness as to how strong a unit (industry, for example) will be hit. Apart from that, wages and salaries also grow more uncertain during a recession. Finally, low-income, developing countries seem to experience the worst uncertainty. All these factors characterize uncertainty.
The second question is concerned with the factors that cause varied levels of uncertainty, its sources. The first one that Bloom mentions is the “bad news,” negative events, including oil price shocks and terrorist attacks alike (161).
According to Bloom, “good news” can also increase uncertainty, but do so with lesser frequency since they rarely cause shock and occur more gradually (162). Other causes of uncertainty, according to the research, include reduced information flow (in the times when business is “bad”), reduced confidence as a result of changes and unfamiliar situations (like recessions), hyperactive or unclear public policy (especially since change provokes experiments in politics as well) as well as the possibilities of experimenting and researching caused by the change that increase the micro uncertainty, which can spread to the macro level.
As for lower-income countries, their economies are often not differentiated and depend largely on particular goods, which makes them vulnerable; the goods are typically volatile as they are (for example, oil); the “bad news” are more likely to occur in these countries. These factors explain the higher susceptibility to the uncertainty that is characteristic of developing countries.
The significance of uncertainty fluctuations is discussed as the third question. In this respect, Bloom mentions the real options theory and demonstrates how uncertainty affects the choice of options and makes the actors respond less actively to the changes in the market. Bloom makes the conclusion that, at the time of uncertainty, stimuli need to be more aggressive to get a reaction, which is not likely to happen since all the actors have reduced confidence.
As a result of risk aversion, risk premia tends to be increased during uncertainty; the investment also reduces due to the uncertainty of forecasters and investor agents. Another impact of uncertainty fluctuation is the increased saving that results in reduced expenditure, which, however, can be beneficial for the economy, in the long run, unless the savings flow abroad, which is not unlikely in open economies, or unless the prices in a closed economy are sticky.
Still, Bloom points out that uncertainty can lead to growth in case the option of risk is more attractive than that of staying out, or in case a company can expand in a way that allows it exploit a good outcome and get some profit from the negative one (the Oi–Hartman–Abel effect). As for the identification of the impact of uncertainty, it can be carried out with the help of examining the changes after an uncertainty shock, using models that quantify potential uncertainty effects, and carrying out natural experiments (for example, in the context of natural disasters). All this research allows detecting the impacts discussed above; apart from that, it has been noted that uncertainty tends to encourage research.
The final question of Bloom is concerned with the role of uncertainty in the Great Recession. According to Bloom, the then-current research appears to overestimate this role that is not very noticeable. To conclude, the author suggests further research into uncertainty.
Works Cited
Bloom, Nicholas. “Fluctuations in Uncertainty.” Journal of Economic Perspectives 28.2 (2014): 153-176. American Economic Association. Web.