Financial and economic uncertainties and their effects on the economy

Fortin, InesORCID:; Hlouskova, JaroslavaORCID: and Sögner, LeopoldORCID: (2023) Financial and economic uncertainties and their effects on the economy. Empirica.

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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.

Item Type: Article in Academic Journal
Keywords: Financial uncertainty, Economic uncertainty, Financial crisis, Forecasting
Funders: OeNB
Classification Codes (e.g. JEL): C53, G01, G20, E44
Research Units: Current Research Groups > Macroeconomics and Business Cycles
Date Deposited: 29 Mar 2023 14:06
Last Modified: 21 Feb 2024 12:48
DOI: 10.1007/s10663-023-09570-3

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