The Asymmetric Effects of Uncertainty

In the wake of the financial crisis and severe recession, the U.S. economy’s recovery has been sluggish by historical standards. One oftencited explanation for the tepid recovery is that elevated uncertainty about the future has been a drag on economic activity. Several episodes of heightened uncertainty followed the financial crisis. In May 2010, the European sovereign debt crisis caused financial markets to question the survival of the euro area and how the crisis would be resolved. Similarly, in August 2011, the U.S. debt ceiling crisis cast doubts on the U.S. government’s commitment to repay its debts, causing financial turmoil. In June 2013, uncertainty about the Federal Reserve’s plans for slowing the pace of ongoing asset purchases after a speech by then-Chairman Ben Bernanke resulted in a brief period of heightened financial market volatility that is popularly called the “taper tantrum. ” A large increase in uncertainty during each of these episodes may have slowed the recovery. In each case, however, uncertaint