Ivan Alfaro

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

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.

National Bureau of Economic Research
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