The macroeconomic impact of asymmetric uncertainty shocks

Abstract

Political shocks impact the economy in different ways, depending of their nature. To capture these effects effectively, we present the Uncertainty Perception Indicator (UPI) based on German newspaper content. This approach combines the time-inherent stability of simple counts of articles with the thematic openness and flexibility of topic models. Using the dynamic RollingLDA technique facilitates the close-to-real-time identification of both the magnitude of an uncertainty shock and its specific characteristics. Hence, the UPI could prove highly useful for economic forecasters and policymakers, since it renders possible more timely and targeted policy reactions.

Employing a Bayesian VAR approach, we analyze the effects of various UPI shocks on fixed investment and other macroeconomic variables. Our results document the asymmetric nature of uncertainty shocks, as their consequences are dependent on the respective sources of uncertainty. We find that international shocks only have weak effects on the German macroeconomy, while domestic policy shocks prove to be highly significant. These results markedly differ from earlier studies that, in the case of Germany, tend to maintain the opposite.