Department of Economics Working Papers,
Vienna University of Economics and Business, Department of Economics

Abstract: In this paper, we estimate a Bayesian vector autoregressive (VAR) model with factor stochastic volatility in the error term to assess the effects of an uncertainty shock in the Euro area (EA). This allows us to incorporate uncertainty directly into the econometric framework and treat it as a latent quantity. Only a limited number of papers estimates impacts of uncertainty and macroeconomic consequences jointly, and most literature in this sphere is based on single countries. We analyze the special case of a shock restricted to the Euro area, whose countries are highly related by definition. Among other variables, we find significant results of a decrease in real activity measured by GDP in most Euro area countries over a period of roughly a year following an uncertainty shock.

Keywords: vector autoregressive models, factor stochastic volatility, uncertainty shocks

JEL-codes: C30; F41; E32 April 2018

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