A Streamlined Procedure to Construct a Macroeconomic Uncertainty Index with an Application to the Ecuadorian Economy

Guillermo Avellán, Manuel González-Astudillo and Juan José Salcedo

MPRA Paper from University Library of Munich, Germany

Abstract: This paper develops a macroeconomic uncertainty index based on the methodology proposed by Jurado, Ludvigson, and Ng (2015).Our approach streamlines the computation of the macroeconomic uncertainty index by using a state-space model that allows us to obtain the unforecastable component of the macroeconomic variables used to construct the index and the latent factors. Moreover, we estimate this state-space model by maximum likelihood, obtaining the parameters of the model and the latent factors in one step, which is more efficient, by construction, than a multi-stage estimation. Finally, with the forecast errors of the state-space model, we propose to estimate stochastic volatility models also by maximum likelihood, using a density filter that could be faster than a Bayesian estimation. After showing that our methodology produces reasonable results for the United States, we apply it to compute a macroeconomic uncertainty index for Ecuador. Our estimate is the first of this kind for a developing or middle-income country. The results show that the Ecuadorian economy is more volatile and less predictable during recessions. We also provide evidence that macroeconomic uncertainty is detrimental to economic activity, finding that the responses of non-oil GDP, the unemployment rate, and consumer prices to macro uncertainty shocks are sizable and persistent.

Keywords: Macroeconomic uncertainty; state-space model; stochastic volatility; density filter (search for similar items in EconPapers)
JEL-codes: C32 D80 E32 (search for similar items in EconPapers)
Date: 2020-08-06
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/102593/1/MPRA_paper_102593.pdf original version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:102593

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().