The sources of economic uncertainty: Evidence from eurozone markets

Abstract

This study examines the sources of economic uncertainty in Euro Area countries with a special focus on the effects of the ECB’s monetary policy on economic uncertainty, for the period between 2001 and 2020. The contribution of the research lies (a) on the employment of an uncertainty factor that combines information from different uncertainty variables, rather than just one as in many previous studies, (b) on the fact that we obtain our results with the employment of a significant number of variables that consist a large data set which offers a great amount of information and (c) the examination of the behavior of Core and Peripheral Eurozone countries, since many studies indicate that their reaction to economic shocks may be different. We examine a sample of four Core and four Peripheral Eurozone Countries and employ for each country and for panel data a Factor-Augmented Vector Autoregression framework (FAVAR) with six different factors (real activity, inflation, interest rates, monetary policy, financial market and uncertainty). The results indicate that real activity and financial markets are important contributors to economic uncertainty, especially for the Core Eurozone countries, while for the Peripheral countries the uncertainty factor itself seems to contribute to its own level; in addition, our results indicate that periods of high uncertainty tend to be followed by periods of low uncertainty.