Measuring uncertainty: A streamlined application for the Ecuadorian economy

Guillermo Avellán (), Manuel González-Astudillo and Juan José Salcedo Cruz ()
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Guillermo Avellán: Universidad Espíritu Santo
Juan José Salcedo Cruz: Universidad Tecnológica Ecotec

Empirical Economics, 2022, vol. 62, issue 4, No 2, 1517-1542

Abstract: Abstract This paper develops a macroeconomic uncertainty index based on the multistage procedure that combines maximum likelihood and Bayesian estimation methods proposed by Jurado et al. (Am Econ Rev 105(3):1177–1216, 2015). Our approach streamlines the computation of the macroeconomic uncertainty index by specifying a state-space model estimated by maximum likelihood that allows us to obtain in one step the parameters of the model, the dynamic factors, and the forecast errors of the macroeconomic variables used to construct the index. Moreover, we estimate stochastic volatility models on the forecast errors also by maximum likelihood using a density filter that proves to be faster than a Bayesian estimation. After showing that our methodology produces reasonable results for the USA, we apply it to compute a macroeconomic uncertainty index for Ecuador, becoming the first index of this kind for a small developing or middle-income country. The results show that the Ecuadorian economy is more volatile and less predictable during recessions. We also provide evidence that macroeconomic uncertainty is detrimental to economic activity, finding that the responses of non-oil output, employment in the formal sector, and consumer prices to macroeconomic uncertainty shocks are sizable and persistent.

Keywords: Macroeconomic uncertainty; State-space model; Stochastic volatility; Density filter (search for similar items in EconPapers)
JEL-codes: C32 D80 E32 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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DOI: 10.1007/s00181-021-02069-5

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