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Measuring Economic Uncertainty and Its Effects

Angus Moore

The Economic Record, 2017, vol. 93, issue 303, 550-575

Abstract: I construct a monthly index of economic uncertainty for Australia. Economic uncertainty rose to historically high levels during the financial crisis and remained elevated until late 2013. The index is: higher around recessions, elections, monetary policy surprises and some major events; tends to increase faster than it decreases; and is driven by both domestic and foreign factors. I use the index to assess how uncertainty affects the Australian economy. Consistent with the ‘real options’ channel of uncertainty, I find that it reduces investment and employment growth. Similarly, uncertainty raises the household saving ratio, consistent with the ‘precautionary savings’ channel.

Date: 2017
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Handle: RePEc:bla:ecorec:v:93:y:2017:i:303:p:550-575