Title: Understanding the role of uncertainty in the Euro area business cycle
Authors: Geoff Kenny - European Central Bank (Germany)
Cecilia Melo Fernandes - Goethe-University Frankfurt am Main (Germany) [presenting]
Abstract: Parametric and non-parametric measures of economic uncertainty extracted from the density forecasts of professional forecasters are proposed as a statistically and economically well-grounded concept of uncertainty that is linked to the ex ante predictability of economic outcomes. It includes a block of three uncertainty indicators consisting of GDP uncertainty, unemployment uncertainty and inflation uncertainty. The properties of different aggregate uncertainty measures are compared also with reference to other proxies for uncertainty commonly used in the literature. We exploit the timing of the survey in order to identify an exogenous uncertainty shock in a Bayesian Vector AutoRegression (BVAR). The relevance of uncertainty shocks during the Great Recession and subsequent sovereign debt crisis in the Euro area is then assessed both in sample and also in terms of out-of-sample predictive content.