Financial and economic uncertainties and their effects on the economy

Ines Fortin (), Jaroslava Hlouskova and Leopold Sögner
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Ines Fortin: Macroeconomics and Business Cycles, Institute for Advanced Studies
Leopold Sögner: Macroeconomics and Business Cycles, Institute for Advanced Studies

Empirica, 2023, vol. 50, issue 2, No 8, 521 pages

Abstract: Abstract We estimate new indices measuring financial and economic uncertainty in the euro area, Germany, France, the United Kingdom and Austria, following the approach of Jurado et al. (Am Econ Rev 105:1177–1216, 2015), which measures uncertainty by the degree of predictability. We perform an impulse response analysis in a vector error correction framework, where we focus on the impact of both local and global uncertainty shocks on industrial production, employment and the stock market. We find that global financial and economic uncertainties have significant negative effects on local industrial production, employment, and the stock market, while we find hardly any influence of local uncertainty on these variables. In addition we perform a forecasting analysis, where we assess the merits of uncertainty indicators for forecasting industrial production, employment and the stock market, using different performance measures. The results suggest that financial uncertainty significantly improves the forecasts of the stock market in terms of profit-based measures, while economic uncertainty gives, in general, more insight when forecasting macroeconomic variables.

Keywords: Financial uncertainty; Economic uncertainty; Financial crisis; Forecasting (search for similar items in EconPapers)
JEL-codes: C53 E44 G01 G20 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s10663-023-09570-3

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