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Dimensions of macroeconomic uncertainty: a common factor analysis

Author

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  • Henzel, Steffen R.
  • Rengel, Malte

Abstract

Uncertainty about the future course of the economy is a potential driver of aggregate fluctuations. To identify the distinct dimensions of uncertainty in the macroeconomy, we construct a large dataset covering all types of economic uncertainty. We then identify two fundamental factors that account for the common dynamics in this dataset. These factors are interpreted as macroeconomic uncertainty. The first factor captures business cycle uncertainty, while the second factor represents oil and commodity price uncertainty. While both types of uncertainty generate a decline in output, time-varying oil and commodity price uncertainty is more important for fluctuations in real activity. However, nonlinearities seem to amplify the effect of business cycle uncertainty during the global financial crisis. (JEL C32, C38, E32)

Suggested Citation

  • Henzel, Steffen R. & Rengel, Malte, 2017. "Dimensions of macroeconomic uncertainty: a common factor analysis," Munich Reprints in Economics 49932, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:49932
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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