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Title: Creative Destruction and Uncertainty

Author(s): Petr Sedlacek

Publication Date: May 2016

Keyword(s): Business Cycles, creative destruction and uncertainty

Programme Area(s): Monetary Economics and Fluctuations

Abstract: Recessions are times of high uncertainty. But does uncertainty cause downturns or vice versa? This paper argues that counter-cyclical fluctuations in uncertainty are, to a large extent, a natural result of creative destruction. I show analytically how aggregate growth and firm-level uncertainty are linked when firms gradually adopt a leading technology: expansions of the technological frontier widen the dispersion of firm-level productivity shocks, a benchmark measure of uncertainty. In a model of endogenous firm dynamics a technological expansion spurs a creative destruction process generating a temporary downturn and rendering uncertainty counter-cyclical. These predictions are confirmed in U.S. data showing that creative destruction accounts for 20 to 40 percent of overall variation in firm-level uncertainty.

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Bibliographic Reference

Sedlacek, P. 2016. 'Creative Destruction and Uncertainty'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11296