Uncertainty and the Great Recession

Has heightened uncertainty been a major contributor to the Great Recession and the slow recovery in the U.S.? To answer this question, we identify exogenous changes in six uncertainty proxies and quantify their contributions to GDP growth and the unemployment rate. Our results are threefold. First, only a minor part of the rise in uncertainty measures during the Great Recession was driven by exogenous uncertainty shocks. Second, while increased uncertainty explains less than one percentage point of the drop in GDP, macroeconomic uncertainty shocks increased the unemployment rate by up to 0.7 percentage points in 2010 and 2011. Third, economic policy uncertainty had only minor effects on real activity.