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

By Mariarosaria Comunale, Anh D. M. Nguyen

November 3, 2023

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Mariarosaria Comunale, and Anh D. M. Nguyen A Comprehensive Macroeconomic Uncertainty Measure for the Euro Area and its Implications to COVID-19, (USA: International Monetary Fund, 2023) accessed November 8, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper develops a new data-driven metric to capture MacroEconomic Uncertainty (MEU) in the euro area. The measure is constructed as the conditional volatility of the unforecastable components of a large set of time series, accounting for the monetary union as well as cross-country heterogeneity. MEU exhibits the largest spike at the time of the COVID-19 outbreak and is noticeably different from other more financial-oriented and policy-driven uncertainty measures. It also reveals a significant increase in inflation uncertainty in 2021-2022. Our BVAR-based analysis shows that an unexpected increase in the MEU has a negative and persistent impact on euro area's industrial production, accounting for 80 percent of its reduction during the first wave of COVID-19, therefore supporting the interpretation of COVID-19 shock as a macroeconomic uncertainty shock. Public debt increases in response to this uncertainty shock. Finally, an increase in MEU negatively affects Emerging Europe countries, contributing the most to the decline in their economic activity during this 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

Publication Details

Pages:

77
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2023/229
Stock No:

WPIEA2023229
ISBN:

9798400258176
ISSN:

1018-5941

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