Affiliation:
1. Danmarks Nationalbank, Research Department (email: )
2. Queen Mary University of London, School of Economics and Finance (email: )
Abstract
After the Brexit referendum, the behavior of the UK economy defied widespread expectations, as it did not exhibit a V-shaped recession but a slow decline in production. We show that this pattern of propagation arises when uncertainty is about future, rather than current, fundamentals and if the expected duration of uncertainty is sufficiently long. We reach this conclusion within the confines of a heterogeneous firms model featuring news uncertainty rather than conventional uncertainty shocks. In the quantitative analysis, uncertainty is informed by firm-level probability distributions on the expected effect of Brexit on sales. (JEL E22, E23, E24, E32, F15)
Publisher
American Economic Association
Cited by
5 articles.
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