Uncertainty and the macroeconomy: evidence from an uncertainty composite indicator

Abstract

ABSTRACTThis article 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 a dynamic factor model, 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.