Uncertainty and the Great Recession

Born, Benjamin; Breuer, Sebastian; Elstner, Steffen

doi:10.1111/obes.12229

Cited by 43 publications

(39 citation statements)

References 30 publications

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“…Moreover, several studies report a strong comovement of various uncertainty proxies (see, e.g., Born, Breuer, and Elstner, 2016). While these findings are essentially based on US data, we subsequently present corresponding evidence from the four largest euro-area economies.…”

Section: Descriptive Evidencesupporting

confidence: 57%

On measuring uncertainty and its impact on investment: Cross-country evidence from the euro area

Meinen

Oke

2017

European Economic Review

132

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In view of the sluggish recovery of euro area investment in the course of the financial and sovereign debt crisis, the role of aggregate uncertainty as an impediment to growth has been a topic of heightened interest. While theory points to a number of channels through which an adverse impact of uncertainty on investment can be rationalized, empirical research suffers from the lack of an objective measure of uncertainty, complicating a sound evaluation of uncertainty and its effect on investment. Hence, it is hardly surprising that the literature comes up with a range of uncertainty proxies which, from a conceptual point of view, vary in some cases substantially. ContributionFocussing on the four largest euro-area countries, this paper investigates the role of uncertainty for investment dynamics. By doing so, we compare five prominent uncertainty proxies put forward in the recent literature: the (implied) stock market volatility, a surveyderived measure of expectations dispersion, a newspaper-based indicator of policy uncertainty, and two indicators taking up the concept of (econometric) unpredictability. The analysis of the different uncertainty proxies is conducted on the grounds of both descriptive and VAR model-based evidence. ResultsAlthough all uncertainty measures show countercyclical behaviour, we find uncertainty as measured by the conditional volatility of the unforecastable components of a broad set of time series to exhibit noticeable robust effects across different model specifications and countries. This is remarkable as the indicator is closely related to the typical notion of uncertainty by approximating the purely unforecastable component of future values of macroeconomic indicators given the information set available to an economic decision maker. Based on this type of uncertainty proxy, we document pronounced negative investment responses to uncertainty shocks. Moreover, we find that uncertainty can account for a relevant portion of the decrease in gross fixed capital formation in machinery and equipment in the course of the Great Recession. Deutsche BundesbankAbstract Investment fell sharply in the euro area after the financial crisis and has not yet returned to pre-crisis levels in many core economies. Focusing on the four largest euro-area countries, this paper investigates the role of uncertainty for investment dynamics. By doing so, we compare five prominent uncertainty proxies put forward in the recent literature: the (implied) stock market volatility, a survey-derived measure of expectations dispersion, a newspaper-based indicator of policy uncertainty, and two indicators taking up the concept of (econometric) unpredictability. Although all uncertainty measures show countercyclical behavior, we find uncertainty as measured by the conditional volatility of the unforecastable components of a broad set of time series to exhibit noticeable robust effects across different model specifications and countries. Based on this type of uncertainty proxy, we document pronounced negative investment r...

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Section: Descriptive Evidencesupporting

confidence: 57%

On measuring uncertainty and its impact on investment: Cross-country evidence from the euro area

Meinen

Oke

2017

European Economic Review

132

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“…and one or more policy-related terms), (ii) the number of federal tax code provisions set to expire, and (iii) the extent of forecaster disagreement over future inflation and government purchases. 10 As an alternative to the VXO index, we could have used the newer VIX index, which was introduced by the CBOE on September 22, 2003. The VIX is obtained from the European style S&P500 index option prices and incorporates information from the volatility skew by using a broader range of strike prices than just at-the-money strike series as in the VXO.…”

Section: Datamentioning

confidence: 99%

Uncertainty and the macroeconomy: evidence from an uncertainty composite indicator

2017

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This paper proposes a 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.

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“…Inspired by the seminal article of Bloom (2009), some authors pointed to exogenous changes in uncertainty ("uncertainty shocks") as a potential contributor (see, e.g., Born, Breuer, and Elstner, 2014;Grimme, Henzel, and Bonakdar, 2015). Others argued that causation ran the opposite way, namely that first moment macroeconomic shocks, not uncertainty shocks, lead to the Great Recession, but that the endogenous response of uncertainty to such shocks then indeed amplified the economic downturn (see, e.g., Bachmann and Moscarini, 2012).…”

Section: Introductionmentioning

confidence: 99%

Business Uncertainty and the Effectiveness of Fiscal Policy in Germany

Berg

2017

Macroecon. Dynam.

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This paper explores how business uncertainty affects the effectiveness of fiscal policy in Germany in the years 1970 to 2014. I use measures of business uncertainty that are derived from the firm-level data of the Ifo Business Climate Survey and interact them with the parameters of a structural vector autoregression to produce state-dependent spending multipliers. I observe that fiscal policy is most effective when uncertainty is high and that the difference in multipliers across uncertainty levels is largest for longer-term horizons. The results also point to a prominent role for business confidence in the state-dependent transmission of spending shocks to output. The findings have an important implication for stabilization policies. Since monetary policy is less effective during volatile episodes, fiscal policy is the better tool to stimulate the economy in uncertain times.

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Uncertainty and the Great Recession

Cited by 43 publications

References 30 publications

On measuring uncertainty and its impact on investment: Cross-country evidence from the euro area

On measuring uncertainty and its impact on investment: Cross-country evidence from the euro area

Uncertainty and the macroeconomy: evidence from an uncertainty composite indicator

Business Uncertainty and the Effectiveness of Fiscal Policy in Germany

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