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Assessing uncertainty in Europe and the US: is there a common uncertainty factor?

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  • Sauter, Oliver

Abstract

This paper is an empirical investigation of uncertainty in the Euro Zone as well as the US. It conducts a factor analysis of uncertainty measures starting in 2001 until the end of 2011. For this purpose I use survey-based data provided by the ECB and the Federal Reserve Bank of Philadelphia as well as the stock market indices VSTOXX and VIX, both measures of implied volatility of stock market movements. Each measure shows an increase in uncertainty during the last years marked by the financial turmoil. Given the rise in uncertainty, the question arises whether this uncertainty is driven by the same underlying forces. For the Euro Zone, I show that uncertainty can be separated into driving forces of short and long-term uncertainty. In the US there is a sharp distinction between uncertainty that drives stock market and “real” variables on the one hand and inflation (short and long-term) on the other hand. Combing both data sets, factor analysis delivers (1) an international stock market factor, (2) a common European uncertainty factor and (3) an US-inflation uncertainty factor.

Suggested Citation

  • Sauter, Oliver, 2012. "Assessing uncertainty in Europe and the US: is there a common uncertainty factor?," MPRA Paper 38031, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:38031
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    File URL: https://mpra.ub.uni-muenchen.de/38031/1/MPRA_paper_38031.pdf
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    References listed on IDEAS

    as
    1. Giordani, Paolo & Soderlind, Paul, 2003. "Inflation forecast uncertainty," European Economic Review, Elsevier, vol. 47(6), pages 1037-1059, December.
    2. Bekaert, Geert & Hoerova, Marie & Lo Duca, Marco, 2013. "Risk, uncertainty and monetary policy," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 771-788.
    3. Christopher J. Neely, 2005. "Using implied volatility to measure uncertainty about interest rates," Review, Federal Reserve Bank of St. Louis, issue May, pages 407-425.
    4. Gabriela Galati & Steven Poelhekke & Chen Zhou, 2011. "Did the Crisis Affect Inflation Expectations?," International Journal of Central Banking, International Journal of Central Banking, vol. 7(1), pages 167-207, March.
    5. Caporale, Guglielmo Maria & Kontonikas, Alexandros, 2009. "The Euro and inflation uncertainty in the European Monetary Union," Journal of International Money and Finance, Elsevier, vol. 28(6), pages 954-971, October.
    6. Guglielmo Caporale & Luca Onorante & Paolo Paesani, 2012. "Inflation and inflation uncertainty in the euro area," Empirical Economics, Springer, vol. 43(2), pages 597-615, October.
    7. Sylvain Leduc & Glenn D. Rudebusch & Justin Weidner, 2009. "Disagreement about the inflation outlook," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct5.
    8. Felix Geiger & Oliver Sauter & Kai D. Schmid, 2009. "The Camp View of Inflation Forecasts," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 320/2009, Department of Economics, University of Hohenheim, Germany.
    9. Carlos Bowles & Roberta Friz & Veronique Genre & Geoff Kenny & Aidan Meyler & Tuomas Rautanen, 2007. "The ECB survey of professional forecasters (SPF) – A review after eight years’ experience," Occasional Paper Series 59, European Central Bank.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    monetary policy; uncertainty; survey forecast; forecast disagreement; factor analysis;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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