The Finance Uncertainty Multiplier

We show how real and financial frictions amplify, prolong, and propagate the negative impact of uncertainty shocks. We use a novel instrumentation strategy to address endogeneity in estimating the impact of uncertainty by exploiting differential firm exposure to exchange rate, policy, and energy price volatility. We show that financially constrained firms cut investment more than unconstrained firms following an uncertainty shock. We then build a general equilibrium heterogeneous firms model with real and financial frictions, finding that financial frictions (i) amplify uncertainty shocks by doubling their impact on output; (ii) increase persistence by doubling the duration of the drop; and (iii) propagate uncertainty shocks by spreading their impact onto financial variables.