The impact of uncertainty on business cycles in Brazil

Abstract

The literature on the determinants of short-run fluctuations in economic activity abound but attempts to account for the role of uncertainty only emerged after the Great Recession. Increasing uncertainty slows down economic activity as precautionary behavior leads companies to delay investment plans and households to postpone consumption. This paper evaluates the importance of uncertainty to short-run fluctuations in the Brazilian economy. Using monthly data from 1996 to 2023 and relying on several proxies for uncertainty, the article estimates models based on the generalized method of moments, which controls the possibility of endogeneity. The results indicate that increases in uncertainty – particularly that associated with financial markets’ instability – weaken aggregate demand in Brazil.