DP11296 Creative Destruction and Uncertainty
| Author(s): | Petr Sedlacek |
| Publication Date: | May 2016 |
| Keyword(s): | Business Cycles, creative destruction, uncertainty |
| JEL(s): | D22, D80, E32 |
| Programme Areas: | Monetary Economics and Fluctuations |
| Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=11296 |
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.