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Transmission of uncertainty shocks: Learning from heterogeneous responses on a panel of EU countries

Peter Claeys () and Bořek Vašíček ()

International Review of Economics & Finance, 2019, vol. 64, issue C, 62-83

Abstract: Numerous recent studies, starting with Bloom (2009), highlight the impact of uncertainty on economic activity. These studies mostly focus on individual countries, while cross-country evidence is scarce. In this paper, we use a set of (panel) BVAR models to study the effect of uncertainty shocks on economic developments in EU Member States. We derive new proxies of domestic uncertainty for individual Member States using dispersion of answers in the Business and Consumer Surveys administered by the European Commission. We also explicitly distinguish between idiosyncratic and common uncertainty shocks. In addition, we assess the impact of structural characteristics in sub-samples of EU countries to understand their role in shock transmission. The results suggest that real output in EU countries drops after spikes in uncertainty, mainly as a result of lower investment. Unlike for the U.S., there is little evidence of activity overshooting following this initial fall. The responses to uncertainty shocks vary across Member States. These differences can be attributed not only to different shock sizes, but also to cross-country structural characteristics. Member States with more flexible labour markets and product markets seem to weather uncertainty shocks better. Likewise, a higher manufacturing share and higher economic diversification help dampen the impact of uncertainty shocks. The role of economic openness is more ambiguous.

Keywords: Bayesian VAR; Economic activity; Uncertainty (search for similar items in EconPapers)
JEL-codes: E32 G12 G35 (search for similar items in EconPapers)
Date: 2019
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Working Paper: Transmission of Uncertainty Shocks: Learning from Heterogeneous Responses on a Panel of EU Countries (2017) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:64:y:2019:i:c:p:62-83

DOI: 10.1016/j.iref.2019.05.012

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