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Licensed Unlicensed Requires Authentication Published by De Gruyter Oldenbourg May 11, 2016

The Impact of Macroeconomic Uncertainty on Activity in the Euro Area

Arne Gieseck and Yannis Largent
From the journal Review of Economics

Abstract

The impact of macroeconomic uncertainty on activity has been a subject of heightened interest in recent years. Empirical literature typically focuses on the US or on individual euro area countries by using the VAR approach. However, there is limited quantitative evidence about the impact of uncertainty on euro area activity available as yet. In this paper, we derive measures of macroeconomic uncertainty in the euro area from an encompassing dataset, and single out some indicators of uncertainty based on theoretical plausibility and empirical evidence. From this set of indicators, we derive an aggregate measure of macroeconomic uncertainty in the euro area. Using a multivariate structural VAR approach, we then offer some quantitative evidence on the impact of macroeconomic uncertainty on euro area activity during the period 1999–2015. Our main findings show that heightened macroeconomic uncertainty, as measured by the proposed indicators, does have a strongly adverse impact on activity in the euro area, albeit the deepness and duration of the shocks differ somewhat across uncertainty measures.

JEL: C32; D80; E20; E44; E66

Acknowledgments

This paper benefited from comments by Michael Stemmer, Hans-Joachim Klöckers, Nick Vidalis and Neale Kennedy. Further helpful suggestions were made at the ifo workshop “Makroökonomik und Konjunktur”, a meeting of the ESCB Working Group on Forecasting as well as internal meetings at the ECB, all held in 2015.

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Annex 1. Financial market indicators

  1. Exchange rate volatility:

  2. Euro area, US: US Dollar/Euro 1-month OTC Option Implied Volatility (ask)

  3. Canada: USDCAD 1 Month ATM Implied Volatility

  4. Japan: Japanese Yen/US Dollar 1-month OTC Option Implied Volatility

  5. United Kingdom: GB Pound Sterling/US Dollar 1-month OTC Option Implied Volatility

  1. Implied bond market volatility:

  2. Euro area: Eurex Generic 1st “RX” Future, implied volatility on call/put

  3. United States: Intercontinental Exchange (ICE) Generic 1st “CO” Future, implied volatility on call/put

  4. All other countries: Realised volatility measured as monthly standard deviation of daily 10-year government bond yields on secondary markets

  1. Implied equity market volatility:

  2. Euro area: Dow Jones EURO STOXX 50 Volatility Index VSTOXX

  3. United States: Standard & Poor’s 500 Index (SPX), implied volatility on call /put

  4. Japan: Nikkei 225 Index (NKY), implied volatility on call/put

  5. United Kingdom: Royal Sun alliance, implied volatility on call/put

Annex 2. Overview of uncertainty measures by country

  1. Euro area:

  2. Systemic stress: Systemic Stress Composite Indicator, bond market volatility, exchange rate volatility, equity market volatility, and financial intermediation

  3. Financial market uncertainty: implied exchange rate volatility, implied bond market volatility, implied equity market volatility

  4. Political uncertainty index

  5. Forecast disagreement: GDP, private consumption, fixed capital formation, inflation, long-term interest rates

  6. Aggregate forecast uncertainty: real GDP, HICP inflation, unemployment rate

  1. United States:

  2. Financial market uncertainty: implied exchange rate volatility, implied bond market volatility, implied equity market volatility

  3. Political uncertainty index

  4. Forecast disagreement: GDP, private consumption, fixed capital formation, inflation, long-term interest rates

  5. Forecast disagreement (SPF): real GDP, HICP inflation, unemployment rate

  1. United Kingdom, Japan

  2. Financial market uncertainty: implied exchange rate volatility, implied bond market volatility, implied equity market volatility

  3. Political uncertainty index

  4. Forecast disagreement: GDP, private consumption, fixed capital formation, inflation, long-term interest rates

Annex 3. Correlation between economic activity and uncertainty indicators.

United StatesForecast uncertaintyFinancial market uncertaintyEconomic policy uncertaintyMacroeconomic uncertainty
Macroeconomic variableForecaster disagreement current yearForecaster disagreement next yearSPF Forecast Dispersion
Real GDP–0.20–0.39–0.46–0.49–0.44–0.53
Real private consumption–0.14–0.37–0.58–0.43–0.39–0.55
Real investment–0.37–0.48–0.55–0.50–0.25–0.57
JapanForecast uncertaintyFinancial market uncertaintyEconomic policy uncertaintyMacroeconomic uncertainty
Macroeconomic variableForecaster disagreement current yearForecaster disagreement next year
Real GDP–0.090.14–0.370.05–0.20
Real private consumption0.060.18–0.050.190.12
Real investment–0.23–0.09–0.350.04–0.27
United KingdomForecast uncertaintyFinancial market uncertaintyEconomic policy uncertaintyMacroeconomic uncertainty
Macroeconomic variableForecaster disagreement current yearForecaster disagreement next year
Real GDP–0.22–0.45–0.62–0.22–0.58
Real private consumption–0.28–0.46–0.46–0.27–0.50
Real investment–0.14–0.28–0.35–0.04–0.27
Total employment–0.31–0.32–0.39–0.01–0.28
Total hours worked–0.31–0.36–0.410.15–0.18

Annex 4. Granger causality tests

United StatesGranger causality test
Observations = 66 (1999:1–2015:4)
Lags = 2
Euro area
Real GDPInvestmentPrivate consumptionMacroeconomic uncertaintyPolitical UncertaintyFinancial market uncertaintySPF Aggregate uncertaintyDisagreement current yearDisagreement next year
Real GDP10.04670.0008
Investment10.00860.0378
Private consumption10.00770.03440.00180.0045
Macroeconomic uncertainty1
Political Uncertainty1
Financial market uncertainty0.01431
Aggregate uncertainty1
Disagr. Current year1
Disagr. Next year1
United KingdomGranger causality test
Observations = 66 (1999:1–2015:4)
Lags = 2
United Kingdom
Real GDPInvestmentPrivate consumptionEmploymentHours workedMacroeconmic uncertaintyPolitical UncertaintyFinancial market uncertaintyDisagreement current yearDisagreement next year
Real GDP10.00270.0002
Investment10.0233
Private consumption10.0150.00680.0006
Employment10.0087
Hours worked10.0226
Macroeconomic uncertainty0.03961
Political Uncertainty1
Financial market uncertainty0.01050.00920.00031
Disagr. Current year1
Disagr. Next year0.00951
JapanGranger causality test
Observations = 66 (1999:1–2015:4)
Lags = 2
Japan
Real GDPInvestmentPrivate consumptionMacroeconomic uncertaintyPolitical UncertaintyFinancial market uncertaintyDisagreement current yearDisagreement next year
Real GDP10.04040.0300
Investment10.01840.0123
Private consumption10.00280.04690.0408
Macroeconomic uncertainty1
Political Uncertainty0.03971
Financial market uncertainty0.03181
Disagr. Current year1
Disagr. Next year1

Annex 5. Impulse responses in the euro area

  1. Response of real GDP growth to a shock on Macroeconomic uncertainty indicator

  2. Response of real GDP growth to a shock on Financial market uncertainty

  3. Response of real GDP growth to a shock on Systemic stress indicator

  4. Response of real GDP growth to a shock on Economic policy uncertainty index

  5. Response of Investment to a shock on Macroeconomic uncertainty indicator

  6. Response of Investment to a shock on Systemic stress indicator

  7. Response of Investment to a shock on Financial market uncertainty

  8. Response of Private consumption to a shock on Systemic stress indicator

  9. Response of Private consumption to a shock on Economic policy uncertainty index

  10. Response of Private consumption to a shock on Macroeconomic uncertainty indicator


Notes

The views expressed in this paper are those of the authors and not necessarily those of the European Central Bank.


Published Online: 2016-5-11
Published in Print: 2016-5-1

©2016 by De Gruyter

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