There is more to macroeconomics than blogosphere debates often reflect. From Nicholas Bloom, Max Floetotto, Nir Jaimovich, Itay Saporta-Eksten, and Stephen J. Terry (ungated versions here):
We propose uncertainty shocks as a new shock that drives business cycles. First, we demonstrate that microeconomic uncertainty is robustly countercyclical, rising sharply during recessions, particularly during the Great Recession of 2007-2009. Second, we quantify the impact of time-varying uncertainty on the economy in a dynamic stochastic general equilibrium model with heterogeneous firms. We find that reasonably calibrated uncertainty shocks can explain drops and rebounds in GDP of around 3%. Moreover, we show that increased uncertainty alters the relative impact of government policies, making them initially less effective and then subsequently more effective.
There is no need to think of this as a competitor to Keynesian or market monetarist theory, rather it is a complement. It suggests that the economy needs “repair of trust” in addition to stronger aggregate demand. It suggests that policy weakness and uncertainty may follow from more general uncertainties, rather than being the primary problem.
This result also addresses some of Evan Soltas’s questions here. As of 2006-2007, it was not commonly understood how volatile the economic environment was, and how broken U.S. finance was. The ongoing problems in the eurozone, even if their effects on U.S. exports are small, are a nagging reminder that “Toto, we don’t live in Kansas any more.”