Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2007:14: A Critical Look at Measures of Macroeconomic Uncertainty

David Kjellberg and Erik Post ()
Additional contact information
David Kjellberg: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Erik Post: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: This paper takes a critical look at available proxies of uncertainty. Two questions are adressed: (i) How do we evaluate proxies given that subjective uncertainty is inherently unobservable? (ii) Is there such a thing as a general macroeconomic uncertainty? Using correlations, some narrative evidence and a factor analysis we find that disagreement and stock market volatility proxies seem to be valid measures of uncertainty whereas probability forecast measures are not. This result is reinforced when we use our proxies in standard macroeconomic applications where uncertainty is supposed to matter. Uncertainty is positively correlated with the absolute value of the GDP-gap.

Keywords: Uncertainty; Macroeconomics; Survey Data

JEL-codes: C42; C82

27 pages, February 28, 2007

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