Major uncertainty shocks lead to rapid economic downturns and recoveries.
Uncertainty spikes after major events like crises and attacks. A model was created to study how this uncertainty affects the economy. When uncertainty is high, businesses pause investments and hiring, leading to a drop in output and employment. Over time, the economy bounces back, but with increased volatility. This pattern of sharp recessions and recoveries is seen in both simulated and actual data. Considering both labor and capital adjustment costs is crucial for accurate analysis.