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.
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
Exchange rate volatility:
Euro area, US: US Dollar/Euro 1-month OTC Option Implied Volatility (ask)
Canada: USDCAD 1 Month ATM Implied Volatility
Japan: Japanese Yen/US Dollar 1-month OTC Option Implied Volatility
United Kingdom: GB Pound Sterling/US Dollar 1-month OTC Option Implied Volatility
Implied bond market volatility:
Euro area: Eurex Generic 1st “RX” Future, implied volatility on call/put
United States: Intercontinental Exchange (ICE) Generic 1st “CO” Future, implied volatility on call/put
All other countries: Realised volatility measured as monthly standard deviation of daily 10-year government bond yields on secondary markets
Implied equity market volatility:
Euro area: Dow Jones EURO STOXX 50 Volatility Index VSTOXX
United States: Standard & Poor’s 500 Index (SPX), implied volatility on call /put
Japan: Nikkei 225 Index (NKY), implied volatility on call/put
United Kingdom: Royal Sun alliance, implied volatility on call/put
Annex 2. Overview of uncertainty measures by country
Euro area:
Systemic stress: Systemic Stress Composite Indicator, bond market volatility, exchange rate volatility, equity market volatility, and financial intermediation
Financial market uncertainty: implied exchange rate volatility, implied bond market volatility, implied equity market volatility
Political uncertainty index
Forecast disagreement: GDP, private consumption, fixed capital formation, inflation, long-term interest rates
Aggregate forecast uncertainty: real GDP, HICP inflation, unemployment rate
United States:
Financial market uncertainty: implied exchange rate volatility, implied bond market volatility, implied equity market volatility
Political uncertainty index
Forecast disagreement: GDP, private consumption, fixed capital formation, inflation, long-term interest rates
Forecast disagreement (SPF): real GDP, HICP inflation, unemployment rate
United Kingdom, Japan
Financial market uncertainty: implied exchange rate volatility, implied bond market volatility, implied equity market volatility
Political uncertainty index
Forecast disagreement: GDP, private consumption, fixed capital formation, inflation, long-term interest rates
Annex 3. Correlation between economic activity and uncertainty indicators.
| United States | Forecast uncertainty | Financial market uncertainty | Economic policy uncertainty | Macroeconomic uncertainty | ||
| Macroeconomic variable | Forecaster disagreement current year | Forecaster disagreement next year | SPF 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 |
| Japan | Forecast uncertainty | Financial market uncertainty | Economic policy uncertainty | Macroeconomic uncertainty | |
| Macroeconomic variable | Forecaster disagreement current year | Forecaster disagreement next year | |||
| Real GDP | –0.09 | 0.14 | –0.37 | 0.05 | –0.20 |
| Real private consumption | 0.06 | 0.18 | –0.05 | 0.19 | 0.12 |
| Real investment | –0.23 | –0.09 | –0.35 | 0.04 | –0.27 |
| United Kingdom | Forecast uncertainty | Financial market uncertainty | Economic policy uncertainty | Macroeconomic uncertainty | |
| Macroeconomic variable | Forecaster disagreement current year | Forecaster 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 | –0.41 | 0.15 | –0.18 |
Annex 4. Granger causality tests
| United States | Granger causality test | ||||||||
| Observations = 66 (1999:1–2015:4) | |||||||||
| Lags = 2 | |||||||||
| Euro area | |||||||||
| Real GDP | Investment | Private consumption | Macroeconomic uncertainty | Political Uncertainty | Financial market uncertainty | SPF Aggregate uncertainty | Disagreement current year | Disagreement next year | |
| Real GDP | 1 | 0.0467 | 0.0008 | ||||||
| Investment | 1 | 0.0086 | 0.0378 | ||||||
| Private consumption | 1 | 0.0077 | 0.0344 | 0.0018 | 0.0045 | ||||
| Macroeconomic uncertainty | 1 | ||||||||
| Political Uncertainty | 1 | ||||||||
| Financial market uncertainty | 0.0143 | 1 | |||||||
| Aggregate uncertainty | 1 | ||||||||
| Disagr. Current year | 1 | ||||||||
| Disagr. Next year | 1 | ||||||||
| United Kingdom | Granger causality test | |||||||||
| Observations = 66 (1999:1–2015:4) | ||||||||||
| Lags = 2 | ||||||||||
| United Kingdom | ||||||||||
| Real GDP | Investment | Private consumption | Employment | Hours worked | Macroeconmic uncertainty | Political Uncertainty | Financial market uncertainty | Disagreement current year | Disagreement next year | |
| Real GDP | 1 | 0.0027 | 0.0002 | |||||||
| Investment | 1 | 0.0233 | ||||||||
| Private consumption | 1 | 0.015 | 0.0068 | 0.0006 | ||||||
| Employment | 1 | 0.0087 | ||||||||
| Hours worked | 1 | 0.0226 | ||||||||
| Macroeconomic uncertainty | 0.0396 | 1 | ||||||||
| Political Uncertainty | 1 | |||||||||
| Financial market uncertainty | 0.0105 | 0.0092 | 0.0003 | 1 | ||||||
| Disagr. Current year | 1 | |||||||||
| Disagr. Next year | 0.0095 | 1 | ||||||||
| Japan | Granger causality test | |||||||
| Observations = 66 (1999:1–2015:4) | ||||||||
| Lags = 2 | ||||||||
| Japan | ||||||||
| Real GDP | Investment | Private consumption | Macroeconomic uncertainty | Political Uncertainty | Financial market uncertainty | Disagreement current year | Disagreement next year | |
| Real GDP | 1 | 0.0404 | 0.0300 | |||||
| Investment | 1 | 0.0184 | 0.0123 | |||||
| Private consumption | 1 | 0.0028 | 0.0469 | 0.0408 | ||||
| Macroeconomic uncertainty | 1 | |||||||
| Political Uncertainty | 0.0397 | 1 | ||||||
| Financial market uncertainty | 0.0318 | 1 | ||||||
| Disagr. Current year | 1 | |||||||
| Disagr. Next year | 1 | |||||||
Annex 5. Impulse responses in the euro area
Response of real GDP growth to a shock on Macroeconomic uncertainty indicator
Response of real GDP growth to a shock on Financial market uncertainty
Response of real GDP growth to a shock on Systemic stress indicator
Response of real GDP growth to a shock on Economic policy uncertainty index
Response of Investment to a shock on Macroeconomic uncertainty indicator
Response of Investment to a shock on Systemic stress indicator
Response of Investment to a shock on Financial market uncertainty
Response of Private consumption to a shock on Systemic stress indicator
Response of Private consumption to a shock on Economic policy uncertainty index
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.
©2016 by De Gruyter
