The effects of macro uncertainty shocks in the euro area: a FAVAR approach

Carlos Cañizares Martínez () and Arne Gieseck ()

Empirical Economics, 2025, vol. 68, issue 6, No 11, 2829-2872

Abstract: Abstract This paper estimates the effects of uncertainty shocks on a large set of economic and financial variables in the euro area. For this purpose, we first build a large monthly macro dataset with euro area-wide data, which we summarize by principal components. Second, we estimate a heteroskedastic factor-augmented vector autoregressive model using a survey-based measure of macroeconomic uncertainty and a large dataset. Third, we identify five shocks by employing a new identification scheme based on sign restrictions exploiting our large dataset, including uncertainty shocks, financial shocks, standard monetary policy shocks, aggregate demand shocks, and supply shocks. Fourth, we show more than one hundred impulse responses to an uncertainty shock. In this setup, we find that an uncertainty shock has a significantly negative effect on economic activity measures in the euro area, but has no significant effect on savings and inflation. Moreover, uncertainty shocks trigger a contractionary effect on several measures of financial stability. Finally, we discuss the results and possible policy implications.

Keywords: Uncertainty; Euro area; FAVAR model; Sign restrictions (search for similar items in EconPapers)
JEL-codes: C55 D80 D81 E32 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s00181-025-02717-0

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