Measuring and assessing economic uncertainty

TL;DR

This paper investigates how perceived economic uncertainty impacts economic activity, comparing manufacturer and consumer perceptions across European countries using a novel discrepancy measure and Bayesian analysis.

Contribution

It introduces a new method to quantify disagreement in expectations and analyzes their distinct effects on economic activity across countries.

Findings

Consumer disagreement shocks have larger and longer-lasting effects.

Manufacturer disagreement shocks tend to decrease economic activity.

Disagreement between manufacturers and consumers has opposite impacts on growth.

Abstract

This paper evaluates the dynamic response of economic activity to shocks in uncertainty as percieved by agents.The study focuses on the comparison between the perception of economic uncertainty by manufacturers and consumers.Since uncertainty is not directly observable, we approximate it using the geometric discrepancy indicator of Claveria et al.(2019).This approach allows us quantifying the proportion of disagreement in business and consumer expectations of eleven European countries and the Euro Area.First, we compute three independent indices of discrepancy corresponding to three dimensions of uncertainty (economic, inflation and employment) and we average them to obtain aggregate disagreement measures for businesses and for consumers.Next, we use a bivariate Bayesian vector autoregressive framework to estimate the impulse response functions to innovations in disagreement in every country.We find that the effect on economic activity of shocks to the perception of uncertainty differ markedly between manufacturers and consumers.On the one hand, shocks to consumer discrepancy tend to be of greater magnitude and duration than those to manufacturer discrepancy.On the other hand, innovations in disagreement between the two collectives have an opposite effect on economic activity:shocks to manufacturer discrepancy lead to a decrease in economic activity, as opposed to shocks to consumer discrepancy.This finding is of particular relevance to researchers when using cross-sectional dispersion of survey-based expectations, since the effect on economic growth of shocks to disagreement depend on the type of agent.