Sector-specific uncertainty shocks lead to economic contractions and reduced output.
Sector-specific uncertainty shocks can have a big impact on the economy. By looking at data from different sectors, researchers found that when uncertainty increases in a specific sector, it leads to lower output in that sector. This effect spreads to other sectors, causing a decrease in overall output, hours worked, consumption, and investment. The main reason for this chain reaction is the precautionary pricing motive.