Uncertainty and the Geography of the Great Recession

The high levels of persistent unemployment caused by the 2008 financial crisis have been explained in a variety of ways. What we have shown here is that an explanation grounded in increased levels of policy and general economic uncertainty channel is plausibly of significant importance. It is not just the time series, but also the cross-section of uncertainty levels that is consistent with the observed unemployment increases. We also provide evidence that all of this is not a mere statistical fluke: when compared to competing hypotheses, the uncertainty explanation for the length and depth of the Great Recession shows the potential to add to our understanding in and of itself. As further support for the uncertainty mechanism’s role in driving jumps in unemployment we show that high levels of uncertainty driven by predetermined state-level institutions cause high levels of unemployment.

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