NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Ivan Alfaro

Department of Finance
BI Norwegian Business School
Nydalsveien 37
N-0484 Oslo
Norway

E-Mail: ivan.alfaro@bi.no
Institutional Affiliation: BI Norwegian Business School

NBER Working Papers and Publications

May 2018The Finance Uncertainty Multiplier
with Nicholas Bloom, Xiaoji Lin: w24571
We show how real and financial frictions amplify the impact of uncertainty shocks. We build a model with real frictions, and find adding financial frictions roughly doubles the impact of uncertainty shocks. Higher uncertainty alongside financial frictions induces the standard real-options effects on investment and hiring, but also leads firms to hoard cash, further reducing investment and hiring. We then test the model using a panel of US firms and a novel instrumentation strategy for uncertainty exploiting differential firm exposure to exchange rate and price volatility. These results highlight why in periods with greater financial frictions uncertainty can be particularly damaging.
 
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