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Transmission of Uncertainty Shocks: Learning from Heterogeneous Responses on a Panel of EU Countries

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  • Peter Claeys
  • Borek Vasicek
Abstract
Numerous recent studies, starting with Bloom (2009), highlight the impact of varying uncertainty levels on economic activity. These studies mostly focus on individual countries, and cross-country evidence is scarce. In this paper, we use a set of (panel) BVAR models to study the effect of uncertainty shocks on economic developments in EU Member States. We explicitly distinguish between domestic, common and global uncertainty shocks and employ new proxies of uncertainty. The domestic uncertainty indicators are derived from the Business and Consumer Surveys administered by the European Commission. The common EU-wide uncertainty is subsequently derived by means of a factor model. Finally, the global uncertainty indicator - inspired by Jurado et al. (2015) - is extracted as a common factor from a broad set of forecast indicators that are not driven by the business cycle. The results suggest that real output in EU countries drops after spikes in uncertainty, mainly as a result of lower investment. Unlike for the U.S., there is little evidence of activity overshooting following this initial fall. The responses to uncertainty shocks vary across Member States. These differences can be attributed not mainly to different shock sizes, but rather to cross-country structural characteristics. Member States with more flexible labour markets and product markets seem to weather uncertainty shocks better. Likewise, a higher manufacturing share and higher economic diversification help dampen the impact of uncertainty shocks. The role of economic openness is more ambiguous.

Suggested Citation

  • Peter Claeys & Borek Vasicek, 2017. "Transmission of Uncertainty Shocks: Learning from Heterogeneous Responses on a Panel of EU Countries," Working Papers 2017/13, Czech National Bank.
    • Handle: RePEc:cnb:wpaper:2017/13
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    3. Corina-Florentina Scarlat (Mihai) & Eleodor-Alin Mihai, 2021. "Global Financial Crisis: Economic and Social Impact," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(2), pages 493-499, December.
    4. Nicoletta Pashourtidou, 2022. "Survey-derived proxies for uncertainty: the case of Cyprus," Cyprus Economic Policy Review, University of Cyprus, Economics Research Centre, vol. 16(2), pages 27-56, December.
    5. Śmiech, Sławomir & Papież, Monika & Shahzad, Syed Jawad Hussain, 2020. "Spillover among financial, industrial and consumer uncertainties. The case of EU member states," International Review of Financial Analysis, Elsevier, vol. 70(C).
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    8. Pastorek, Daniel, 2023. "Euro area uncertainty and Euro exchange rate volatility: Exploring the role of transnational economic policy," Finance Research Letters, Elsevier, vol. 58(PA).
    9. Tim Kovalenko, 2021. "Uncertainty shocks and employment fluctuations in Germany: the role of establishment size," Working Papers 212, Bavarian Graduate Program in Economics (BGPE).
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    More about this item

    Keywords

    Bayesian VAR; economic activity; uncertainty;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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