Asymmetric effects of sectoral shifts under low and high uncertainty

Abstract

This paper studies the asymmetric effects of sectoral shifts on economic performance under low and high uncertainty using US data. A sectoral shift is found to induce more depressed economic activity under high uncertainty relative to under low uncertainty. These effects are statistically different across the two uncertainty regimes and are not driven solely by recessions. A tractable two-sector dynamic stochastic general equilibrium model with sectoral shifts and stochastic volatility is able to qualitatively explain these empirical findings.