Uncertainty-Induced Reallocations and the Macroeconomy

Abstract

Focusing on U.S. data, we show the existence of a significant positive link between uncertainty and reallocation from private to government capital. A standard VAR approach suggests that during the Great Recession the observed spike in productivity uncertainty has promoted a reallocation toward public investment that accounts for a large share of the contraction in both private consumption and investment. We rationalize these novel empirical findings in a production economy in which the representative agent has an explicit fear toward uncertainty and government capital is, in equilibrium, a safe asset.