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Measuring and assessing economic uncertainty

Author

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  • Oscar Claveria

    (AQR-IREA, Department of Econometrics, Statistics and Applied Economics, University of Barcelona, 08034 Barcelona, Spain.)

Abstract
This paper evaluates the dynamic response of economic activity to shocks in agents’ perception of uncertainty. The study focuses on the comparison between manufacturers 'and consumers' perception of economic uncertainty. Since uncertainty is not directly observable, we approximate it using the geometric discrepancy indicator of Claveria et al. (2019). This approach allows us quantifying the proportion of disagreement in business and consumer expectations of eleven European countries and the Euro Area. First, we compute three independent indices of discrepancy corresponding to three dimensions of uncertainty (economic, inflation and employment) and we average them to obtain aggregate disagreement measures for businesses and for consumers. Next, we use a bivariate Bayesian vector autoregressive framework to estimate the impulse response functions to innovations in disagreement in every country. We find that the effect on economic activity of shocks to the perception of uncertainty differ markedly between manufacturers and consumers. On the one hand, shocks to consumer discrepancy tend to be of greater magnitude and duration than those to manufacturer discrepancy. On the other hand, innovations in disagreement between the two collectives have an opposite effect on economic activity: shocks to manufacturer discrepancy lead to a decrease in economic activity, as opposed to shocks to consumer discrepancy. This finding is of particular relevance to researchers when using cross-sectional dispersion of survey-based expectations, since the effect on economic growth of shocks to disagreement depend on the type of agent.

Suggested Citation

  • Oscar Claveria, 2020. "Measuring and assessing economic uncertainty," IREA Working Papers 202011, University of Barcelona, Research Institute of Applied Economics, revised Jul 2020.
    • Handle: RePEc:ira:wpaper:202011
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    References listed on IDEAS

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    More about this item

    Keywords

    Economic uncertainty; Production; Inflation; Employment; Expectations; Disagreement. JEL classification: C32; E23; E24; E31.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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