A comprehensive MacroEconomic uncertainty measure for the euro area and its implications to COVID-19

This paper develops a new data-driven metric to capture MacroEconomic Uncertainty (MEU) in the euro area. The measure is constructed as the conditional volatility of the unforecastable components of a large set of time series, accounting for the features of monetary union as well as cross-country heterogeneity. The MEU shows the largest spike at the time of the COVID-19 outbreak and is noticeably different from other more financial-oriented and policy-driven uncertainty measures. It also reveals a significant increase in inflation uncertainty in 2021–2022. Our BVAR-based analysis shows that an unexpected increase in the MEU has a negative and persistent impact on the euro area’s industrial production, with the largest drop in the production of capital goods and durable consumer goods. Also, the effects are heterogeneous across member countries. Notably, the MEU shocks contribute significantly to the reduction of industrial production during the first wave of COVID-19, causing about 40–50 % of the decline in April 2020. Public debt increases in response to increased uncertainty. Finally, an increase in MEU negatively affects Emerging Europe countries, contributing the most to the decline in their economic activity during the COVID-19 period.