Measuring Macroeconomic Uncertainty: An Application for Iran

Abstract

Given that Iran's economy is affected by different fluctuations and innovations, estimating a measure of macroeconomic uncertainty which represents aggregate level of uncertainty in economics has striking importance. This study provides a comprehensive time series measure of macroeconomic uncertainty for Iran, estimated separately for different forecast horizons. We attempt to provide superior econometric estimate of time-varying macro uncertainty and consider it's movements over the period 1991-2015. The estimated measures of macro uncertainty, base-case and its alternatives, show that the important uncertainty episodes of Iran's economy are associated with deep recessions. Specifically, the major spikes in the baseline estimate occurred over the 1992:1-1994:1, around the 1994:3-1995:2, and the 2011:3-2013:3 recessions. Finally, the results of impulse responses show that the macro uncertainty innovations are followed by a significant and persistent decrease in both investment and production, supporting the findings of long-lived negative effects of uncertainty.

Keywords: macroeconomic uncertainty, real activity, stochastic volatility, forecasting model

JEL Classification: C38, E17, E32