A Comprehensive Macroeconomic Uncertainty Measure for the Euro Area and its Implications to COVID-19

IMF Working Papers, November 3, 2023

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Develops a new data-driven metric: MacroEconomic Uncertainty (MEU) for the euro area.
MEU is constructed as the conditional volatility of the unforecastable components of a large set of time series.
The construction accounts for the monetary union as well as cross-country heterogeneity.
Empirical framework uses Bayesian VARs (BVAR-based analysis).

MEU exhibits the largest spike at the time of the COVID-19 outbreak.
MEU is noticeably different from other more financial-oriented and policy-driven uncertainty measures.
The measure reveals a significant increase in inflation uncertainty in 2021-2022.
BVAR-based analysis results:
- An unexpected increase in the MEU has a negative and persistent impact on euro area's industrial production.
- The MEU shock accounts for 80 percent of the reduction in industrial production during the first wave of COVID-19, supporting the interpretation of the COVID-19 shock as a macroeconomic uncertainty shock.
- Public debt increases in response to this uncertainty shock.
International spillovers:
- An increase in MEU negatively affects Emerging Europe countries.
- MEU contributes the most to the decline in Emerging Europe economic activity during the COVID-19 period.

Subject: COVID-19, Financial crises, Global financial crisis of 2008-2009, Health, Industrial production, Production
Keywords: Bayesian VARs, COVID-19, euro area, Europe, Global, Global financial crisis of 2008-2009, IMF working paper No. 2023/229, increase in MEU, Industrial production, macroeconomic uncertainty, macroeconomic uncertainty shock, meu index, uncertainty shock