Yifan Shen

Economics Letters, Volume 196, November 2020

Recommend reason
The events such as Global Financial Crisis of 2007–2009 and Covid-19 outbreak have injected a huge amount of uncertainty in our lives, highlighting the need for understanding macroeconomic uncertainty as an important source of business cycle fluctuations. This study introduces new proxies of macroeconomic uncertainty for the US and other 14 major industrial countries based on the data over 100 years. This allows us to investigate the evolution of uncertainty and its economic impact from a historical perspective. The findings have much policy relevance for the hotly debated topics of measuring uncertainty and evaluating its impact. The constructed proxies of uncertainty could also be utilized in many other studies.

About the author
Yifan Shen, Department of Economics and Finance, School of Economics and Management, Tongji University

Keywords
Uncertainty shocks, Stochastic volatility, Uncertainty spillover

Brief introduction
In this paper, we utilize the cross-country data set compiled by Jordá et al. (2016) and Knoll et al. (2017) to construct 100 years macroeconomic uncertainty measures for the US and other 14 major industrial countries. In the spirit of Jurado et al. (2015), our macroeconomic uncertainty proxy is constructed as conditional variance of the unforecastable component common to a set of macroeconomic variables. Our results show the US macroeconomic uncertainty experiences a declining pattern in the century. Two world wars are the most striking episodes of heightened uncertainty since 1900, followed by the major economic crisis such as the Great Depression started in 1929. Meanwhile, the results show strong patterns of co-movements in uncertainty proxies of 15 countries, with an average correlation of 0.7061. This suggests the existence of a global common component in driving uncertainty fluctuations across countries. The comparison with the Economic Policy Uncertainty Measure (EPU, Baker et al. 2016) shows that these two measures share some commonalities in their movements, in particular before 1960s. However, two proxies diverge after 1960s. The macroeconomic uncertainty measure fluctuates but is relatively stable at a low level, but the EPU surges and gets back to a very high level.

Link
https://www.sciencedirect.com/science/article/pii/S0165176520303566