Uncertainty shocks and systemic-risk indicators

Abstract

The current paper broadens the understanding of the role played by uncertainty in the context of macroeconomic fluctuations. It focuses on the implications of uncertainty shocks for indicators of systemic risk in the financial system. Such indicators‘ signals tend to precede financial crises and are interpreted as signaling the build-up of considerable misallocations of capital and credit. In an empirical analysis we show for a panel of four euro area countries that negative uncertainty shocks, while boosting economic activity, are followed by unfavorable reactions of systemic-risk indicators. We conclude that standard uncertainty measures contain some useful information on the potential build-up of vulnerabilities in the financial system.