Abstract: Are uncertainty shocks an important source of post WWII business cycle fluctuations? The evidence we present in this paper suggests they are. Using both the traditional measure of uncertainty – the stock market volatility index – and a new one - based on the number of New York Times’ articles on uncertainty and economic activity - we demonstrate that these shocks generate short sharp recessions and recoveries. Output, employment, productivity, consumption and investment all decrease in response to an unanticipated rise in uncertainty. Moreover, we find that wide spread changes in the level of uncertainty captured by our new newspaper index can account for between 10 and 25 percent of the short-run variation in these variables.
Keywords: Uncertainty shocks, Business cycles
JEL Classification: E32, E2, C82