Macroeconomic Uncertainty and the COVID-19 Pandemic: Measure and Impacts on the Canadian Economy

This paper constructs a measure of Canadian macroeconomic uncertainty, by ap-plying the Jurado et al. (2015) method to the large database of Fortin-Gagnon et al.(2020). This measure reveals that the COVID-19 pandemic has been associated with a very sharp rise of macroeconomic uncertainty in Canada, confirming other results showing similar big increases in uncertainty in the United States and elsewhere. The paper then uses a structural VAR to compute the impacts on the Canadian economy of uncertainty shocks calibrated to match these recent increases. We show that such shocks lead to severe economic downturns, lower inflation and sizeable accommodating measures from monetary policy. Important distinctions emerge depending on whether the shock is interpreted as originating from US uncertainty –in which case the down-turn is deep but relatively short– or from specifically Canadian uncertainty, which leads to shallower but more protracted declines in economic activity.