Measuring Uncertainty and its Effects in the COVID-19 Era

40 Pages Posted: 31 Mar 2021

See all articles by Andrea Carriero

Andrea Carriero

Queen Mary, University of London

Todd E. Clark

Federal Reserve Bank of Cleveland

Massimiliano Giuseppe Marcellino

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

Elmar Mertens

Deutsche Bundesbank

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2021

Abstract

We measure the effects of the COVID-19 outbreak on uncertainty, and we assess the consequences of the uncertainty for key economic variables. We use a large, heteroskedastic vector autoregression (VAR) in which the error volatilities share two common factors, interpreted as macro and financial uncertainty. Macro and financial uncertainty are allowed to contemporaneously affect the macroeconomy and financial conditions, with changes in the common component of the volatilities providing contemporaneous identifying information on uncertainty. We also consider an extended version of the model that accommodates outliers in volatility, to reduce the influence of extreme observations from the COVID period. Our estimates yield very large increases in macroeconomic and financial uncertainty since the onset of the COVID-19 period. These increases have contributed to the downturn in economic and financial conditions, but the contributions of uncertainty are small compared to the overall movements in many macroeconomic and financial indicators. That implies that the downturn is driven more by other dimensions of the COVID crisis than shocks to aggregate uncertainty (as measured by our method).

JEL Classification: C11, C55, E32, E44

Suggested Citation

Carriero, Andrea and Clark, Todd E. and Marcellino, Massimiliano and Mertens, Elmar, Measuring Uncertainty and its Effects in the COVID-19 Era (March 1, 2021). CEPR Discussion Paper No. DP15965, Available at SSRN: https://ssrn.com/abstract=3816850

Andrea Carriero (Contact Author)

Queen Mary, University of London ( email )

Mile End Road
London, London E1 4NS
United Kingdom

Todd E. Clark

Federal Reserve Bank of Cleveland ( email )

P.O. Box 6387
Cleveland, OH 44101
United States
216-579-2015 (Phone)

Massimiliano Marcellino

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Elmar Mertens

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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