CEPII, Recherche et Expertise sur l'economie mondiale
Uncertainty and the Macroeconomy: Evidence from an Uncertainty Composite Indicator


Amélie Charles
Olivier Darné
Fabien Tripier

 Highlights :
  • We propose a composite indicator of financial, political, and macroeconomic uncertainty.
  • The composite indicator synthesizes the macroeconomic effects of uncertainty within one measure of uncertainty.
  • The properties of the compositive indicator are compared with traditional measures of uncertainty.

 Abstract :
This paper proposes an uncertainty composite indicator (UCI) based on three distinct sources of uncertainty (namely financial, political, and macroeconomic) for the US economy on the period 1985-2015. For that, we use the dynamic factor model proposed by Doz et al. (2012), summarizing efficiently six individual uncertainty proxies, namely two macroeconomic and financial uncertainty factors based on the unpredictability, a measure of (micro)economic uncertainty, the implied volatility index, the corporate bond spreads, and an index of economic policy uncertainty. We then compare the effects of uncertainty on economic activity when the UCI is used instead of individual uncertainty proxies in structural VAR models. The interest of our UCI is to synthesize theses effects within one measure of uncertainty. Overall, the UCI was able to account for the most important dynamics of uncertainty which play an important role in business cycles. We found that the individual uncertainty proxies based macro unpredictability and corporate bond spread are also important source in explaining the volatility of the macroeconomic variables. However, these two individual proxies are not the dominant source of fluctuations (compared to the other uncertainty variables) in some cases.

 Keywords : Uncertainty | Dynamic Factor Model | Business Cycle

 JEL : C38, C32, E32
CEPII Working Paper
N°2017-25, December 2017

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