“A Simple Explanation of Countercyclical Uncertainty“
with Joshua Bernstein, Mike Plante, and Alex Richter
AEJ: Macroeconomics, October 2024, Volume 16(4), Pages 143-171
FRB Dallas Working Paper 2109
Online Appendix

This paper documents that labor search and matching frictions generate countercyclical uncertainty because the inherent nonlinearity in the flow of new matches makes employment uncertainty increasing in the number of people searching for work. Quantitatively, this mechanism is strong enough to explain uncertainty and real activity dynamics, including their correlation. Through this lens, uncertainty fluctuations are endogenous responses to changes in real activity that neither affect the severity of business cycles nor warrant policy intervention, in contrast with leading theories of the interaction between uncertainty and real activity dynamics.