This work deals with the economic impact of uncertainty on macroeconomically important variables in three countries: France, Germany and the United Kingdom. First, the econometric bases are derived, starting with a univariate case. With the introduction of the vector autoregressive model, time series of variables are included, which all depend on and influence each other. Subsequently, the individual preparations, such as Cholesky decomposition, are made to derive the innovations that flow into the system.
After the data and variables to be considered for the model have been described in detail, stationarity tests must be carried out to enable consistent estimates to be made later. For this it is necessary to perform additional transformations. Finally, the VAR model is estimated and the results can be visualized and interpreted. It is shown that short-term shocks in uncertainty have different impacts on the variables under consideration. In addition, country-specific responses can be identified in the course of the Impulse Response Functions, differing in terms of amplitude, direction, behavior and persistence. With the help of Forecast Error Variance Decompositions, interdependencies between variables can be identified and possibly put into a logical, functional context.
Table of Contents
1 Introduction
2 Econometric Methodology
2.1 Autoregressive Model
2.2 Vector Autoregressive Model
2.2.1 Partial Autocorrelation Function
2.2.2 Information Criteria
2.3 Granger Causality
2.4 Cholesky Decomposition
2.5 Impulse Response Function
2.6 Forecast Error Variance Decomposition
3 Data and Indices
3.1 Uncertainty Index
3.2 Industrial Production
3.3 Harmonised Index of Consumer Prices
3.4 Interest and Shadow Rates
3.5 Preparation of Data and (Back-) Testing
3.5.1 Adjustment of the Global Uncertainty Index
3.5.2 Augmented-Dickey-Fuller-Test
4 Empirical Results
4.1 Model Setup
4.1.1 Lag Length Selection
4.1.2 Ljung-Box-Test
4.2 Impulse Response Functions
4.2.1 France
4.2.2 Germany
4.2.3 United Kingdom
4.3 Forecast Error Variance Decompositions
4.3.1 France
4.3.2 Germany
4.3.3 United Kingdom
5 Conclusion
Research Objectives and Key Topics
This thesis examines the economic impact of uncertainty on key macroeconomic variables such as industrial production, inflation, and interest rates in France, Germany, and the United Kingdom. By applying vector autoregressive (VAR) modeling, the study seeks to quantify how uncertainty shocks propagate through these economies and to identify country-specific response patterns.
- Application of Vector Autoregressive (VAR) econometric models
- Use of the Global Economic Policy Uncertainty (GEPU) Index
- Analysis of impulse response functions to measure dynamic effects of shocks
- Decomposition of forecast error variance to determine interdependencies
- Integration of shadow interest rates to account for conventional and unconventional monetary policy
Excerpt from the Book
4.2 Impulse Response Functions
The orthogonalised impulse-response functions theoretically derived in the previous section are determined by a so-called bootstrap procedure and estimated by OLS. For our model, the confidence intervals (68% for 1 standard deviation (σ) as well as 95% for 2 σ are determined using a loop of 500 bootstrap runs to evaluate "the properties of impulse response functions" (Lütkepohl, 2005, p. 126).
For the IRF we now focus on the uncertainty variables, for the sake of completeness an overview with all impulses and their answers can be found on Figure 23, Figure 24 and Figure 25. It is to be shown, if "uncertainty shocks generate short sharp recessions and recoveries" as Bloom (2009, p. 623) states.
In addition, when we talk about confidence bands, we are referring to the 68% (dark grey shaded) confidence bands, unless otherwise stated.
Summary of Chapters
1 Introduction: Provides the motivational context by highlighting the pervasive influence of uncertainty on monetary policy and central bank mandates in major European economies.
2 Econometric Methodology: Details the theoretical foundations of VAR models, including lag order selection, causality testing, and impulse response analysis.
3 Data and Indices: Describes the selection, normalization, and stationarity testing of the datasets utilized, including the GEPU index and industrial production proxies.
4 Empirical Results: Presents the estimated model parameters, discusses the impulse response functions for each country, and breaks down the forecast error variance.
5 Conclusion: Summarizes the key findings regarding the persistence and country-specific nature of uncertainty shocks and their implications for monetary policy.
Keywords
Economic Uncertainty, Vector Autoregressive Model, Monetary Policy, Industrial Production, Inflation, Impulse Response Function, Forecast Error Variance Decomposition, France, Germany, United Kingdom, Granger Causality, Shadow Interest Rates, Econometrics, Macroeconomic Stability, Time Series Analysis
Frequently Asked Questions
What is the core focus of this research?
The work investigates how uncertainty, measured by the Global Economic Policy Uncertainty Index, impacts macroeconomic variables such as industrial production and inflation across France, Germany, and the UK.
What are the primary fields covered in this study?
The paper bridges theoretical econometrics with empirical macroeconomics, focusing on time series analysis, monetary policy transmission, and the quantification of economic risks.
What is the main objective of the thesis?
The objective is to quantify the dynamic effects of uncertainty shocks on the economies of France, Germany, and the UK to better understand how central banks might integrate these factors into their decision-making.
Which scientific methods are employed?
The study utilizes Vector Autoregressive (VAR) models, Cholesky decomposition, Granger causality tests, and impulse response functions (IRFs) to analyze the interdependencies of economic variables.
What does the main body of the work cover?
The main part encompasses the mathematical derivation of the VAR system, data preparation, stationarity testing using the Augmented-Dickey-Fuller test, and the empirical estimation and visualization of results.
Which keywords best describe this paper?
Key terms include Economic Uncertainty, VAR modeling, monetary policy, macroeconomic variables, time series analysis, and country-specific economic shocks.
How does the study handle the "zero lower bound" of interest rates?
The author incorporates "shadow interest rates" as developed by Wu and Xia (2017) to capture the effects of unconventional monetary policies like Quantitative Easing.
Why are there differences in country-specific responses?
The results show that countries react differently due to variations in trade openness, industrial structure, and sensitivity to geopolitical shocks, particularly noting Germany’s high export orientation compared to the UK’s service-heavy economy.
- Arbeit zitieren
- Jens Biewer (Autor:in), 2020, The Economic Impact of Uncertainty on France, Germany and the United Kingdom, München, GRIN Verlag, https://www.grin.com/document/538403
