Measuring Uncertainty and Its Effects in the COVID-19 Era

Massimiliano Marcellino, Andrea Carriero, Todd Clark and Elmar Mertens

No 15965, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We measure the effects of the COVID-19 outbreak on uncertainty, and we assess the consequences of the uncertainty for key economic variables. We use a large, heteroskedastic vector autoregression (VAR) in which the error volatilities share two common factors, interpreted as macro and financial uncertainty. Macro and financial uncertainty are allowed to contemporaneously affect the macroeconomy and financial conditions, with changes in the common component of the volatilities providing contemporaneous identifying information on uncertainty. We also consider an extended version of the model that accommodates outliers in volatility, to reduce the influence of extreme observations from the COVID period. Our estimates yield very large increases in macroeconomic and financial uncertainty since the onset of the COVID-19 period. These increases have contributed to the downturn in economic and financial conditions, but the contributions of uncertainty are small compared to the overall movements in many macroeconomic and financial indicators. That implies that the downturn is driven more by other dimensions of the COVID crisis than shocks to aggregate uncertainty (as measured by our method).

Keywords: Bayesian vars; stochastic volatility; Pandemics (search for similar items in EconPapers)
JEL-codes: C11 C55 E32 E44 (search for similar items in EconPapers)
Date: 2021-03
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (2)

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Working Paper: Measuring Uncertainty and Its Effects in the COVID-19 Era (2022)
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