Impact of uncertainty shocks in the euro area

Bořek Vašíček ()

Quarterly Report on the Euro Area (QREA), 2018, vol. 16, issue 3, 25-40

Abstract: This section discusses the impact of uncertainty on the real economy in the euro area. The empirical analysis uses new country-level indicators of uncertainty for individual euro area Member States derived from the Business and Consumer Surveys. It provides evidence on: i) the differential impact of uncertainty shocks across Member States depending on their structural characteristics;ii) the difference between idiosyncratic and common uncertainty shocks;and iii) the interactions between uncertainty and other adverse shocks (namely, confidence and financial shocks). The results confirm that the real economy (notably investment) in euro area members is negatively affected by an unexpected spike in uncertainty and responses tend to differ across Member States. Individual structural characteristics of the economy appear to determine responses to uncertainty shocks as much as the origin of the shocks themselves (idiosyncratic vs. common shocks). The Member States with more efficient labour markets, product markets and financial systems seem to be able to better weather uncertainty shocks. Likewise, a higher degree of economic openness and a greater manufacturing share in the economy contribute to dampening the impact of uncertainty. The analysis therefore points to the fact that well-functioning labour, product and financial markets are important to strengthen economic resilience in euro area economies. Resilience in turn may have a positive feedback effect on the perception of risks and uncertainties and is crucial for the functioning of the monetary union.

Keywords: economic risk and uncertainty; economic resilience; idiosyncratic and common uncertainty shocks; confidence; financial shocks (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:euf:qreuro:0163-02

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