The Impact of Uncertainty on the German and Austrian Business Cycle

We quantify the impact of sudden changes in uncertainty for business cycle developments in Germany and Austria. Firm-specific economic uncertainty is measured using micro data from the ifo business survey. An increase in firm uncertainty amplifies economic downturns in both, Germany and Austria, while low and declining economic uncertainty may strengthen the recovery. Without changes in uncertainty, industrial production in Germany would have declined by only about half as much during the Great Recession, and for aggregate production, we document a 40% smaller decline. Similar results are found for Austria.