The Cost of Coronavirus Uncertainty: The High Returns to Clear Policy Plans

Abstract

AbstractPolicymakers face an extremely uncertain environment during COVID‐19. Using a nonlinear VAR estimate for the Euro Area, we argue that the benefit of reducing policy uncertainty at a time dominated by pessimistic expectations amounts to several points of GDP. The impact on the economy of uncertainty shocks is much larger during periods of negative outlook for the future. We estimate the impact on industrial production of the current COVID‐19 induced uncertainty to peak at a year‐over‐year growth loss of −15.4 per cent in September 2020, and to lead to a fall in CPI inflation between 1 per cent and 1.5 per cent. Policies providing state‐contingent scenarios ready to be adopted if the worst‐case outcomes materialise can reduce the impact of uncertainty.