By Nicholas Bloom, Max Floetotto, Nir Jaimovich, Itay Saporta-Eksten and Stephen J. Terry
We propose uncertainty shocks as a new shock that drives business cycles. First, we demonstrate that microeconomic uncertainty is robustly countercyclical, rising sharply during recessions, particularly during the Great Recession of 2007-2009. Second, we quantify the impact of time-varying uncertainty on the economy in a dynamic stochastic general equilibrium model with heterogeneous firms. We find that reasonably calibrated uncertainty shocks can explain drops and rebounds in GDP of around 3%. Moreover, we show that increased uncertainty alters the relative impact of government policies, making them initially less effective and then subsequently more effective.
I am not sure I would qualify uncertainty shocks as new shocks. I have mentioned before the paper by Basu and Bundick that also features time varying variance for TFP shocks (plus similar shocks to intertemporal substitution). This paper is still a significant step forward as it uses plant level data to calibrate the shock process and does not need price rigidity to obtain significant results. It is particularly interesting to see how policy response effectiveness changes through time.
See also a previous post on policy uncertainty.