Measuring uncertainty: A streamlined application for the Ecuadorian economy

This paper develops a macroeconomic uncertainty index based on the multistage procedure that combines maximum likelihood and Bayesian estimation methods proposed by Jurado et al. (Am Econ Rev 105(3):1177–1216, 2015). Our approach streamlines the computation of the macroeconomic uncertainty index by...

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Bibliographic Details
Published in:Empirical economics 2022-04, Vol.62 (4), p.1517-1542
Main Authors: Avellán, Guillermo, González-Astudillo, Manuel, Salcedo Cruz, Juan José
Format: Article
Language:English
Subjects:
Bayesian analysis
Consumer prices
Datasets
Density
Developing countries
Econometrics
Economic activity
Economic development
Economic growth
Economic theory
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Economics and Finance
Employment
Finance
GDP
Gross Domestic Product
Insurance
LDCs
Macroeconomics
Management
Prices
Recessions
Securities markets
Statistics for Business
Stock exchanges
Uncertainty
Variables
Volatility
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Summary:This paper develops a macroeconomic uncertainty index based on the multistage procedure that combines maximum likelihood and Bayesian estimation methods proposed by Jurado et al. (Am Econ Rev 105(3):1177–1216, 2015). Our approach streamlines the computation of the macroeconomic uncertainty index by specifying a state-space model estimated by maximum likelihood that allows us to obtain in one step the parameters of the model, the dynamic factors, and the forecast errors of the macroeconomic variables used to construct the index. Moreover, we estimate stochastic volatility models on the forecast errors also by maximum likelihood using a density filter that proves to be faster than a Bayesian estimation. After showing that our methodology produces reasonable results for the USA, we apply it to compute a macroeconomic uncertainty index for Ecuador, becoming the first index of this kind for a small developing or middle-income country. The results show that the Ecuadorian economy is more volatile and less predictable during recessions. We also provide evidence that macroeconomic uncertainty is detrimental to economic activity, finding that the responses of non-oil output, employment in the formal sector, and consumer prices to macroeconomic uncertainty shocks are sizable and persistent.
ISSN:0377-7332
1435-8921
DOI:10.1007/s00181-021-02069-5