Measuring uncertainty: A streamlined application for the Ecuadorian economy

Area of Science:

• Economics
• Econometrics

Background:

• Macroeconomic uncertainty is a key factor influencing economic stability.
• Existing methods for calculating uncertainty indices can be computationally intensive.

Purpose of the Study:

• To develop a more efficient method for constructing a macroeconomic uncertainty index.
• To create the first macroeconomic uncertainty index for Ecuador.
• To analyze the impact of macroeconomic uncertainty on Ecuador's economy.

Main Methods:

• The study employs a multistage procedure combining maximum likelihood and Bayesian estimation.
• A state-space model is specified and estimated using maximum likelihood for streamlined computation.
• Stochastic volatility models are estimated on forecast errors using a density filter.

Main Results:

• The methodology efficiently computes the macroeconomic uncertainty index.
• The first macroeconomic uncertainty index for Ecuador is successfully generated.
• Ecuador's economy exhibits higher volatility and lower predictability during recessions.
• Macroeconomic uncertainty is found to be detrimental to economic activity, affecting non-oil output, formal employment, and consumer prices.

Conclusions:

• The developed methodology offers an efficient approach to calculating macroeconomic uncertainty indices.
• The Ecuadorian economy experiences significant negative consequences from macroeconomic uncertainty, particularly during downturns.
• Policy interventions aimed at reducing uncertainty could foster economic stability and growth in Ecuador.