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The Impact of Pessimistic Expectations on the Effects of COVID-19-Induced Uncertainty in the Euro Area

Publikation: Working paper/Preprint Working paperForskning


  • wp20_12

    Forlagets udgivne version, 627 KB, PDF-dokument

  • Giovanni Pellegrino
  • ,
  • Federico Ravenna, Danmarks Nationalbank, Københavns Universitet, HEC Montreal
  • ,
  • Gabriel Züllig, Københavns Universitet, Danmarks Nationalbank
We estimate an Interacted-VAR model allowing for the impact of uncertainty shocks to depend on the average outlook of the economy measured by survey data. We find that, in response to the same uncertainty shock, industrial production and inflation’s peak decrease is around three and a half times larger during pessimistic times. We build scenarios for a path of innovations in uncertainty consistent with the COVID-19-induced shock. Industrial production is predicted to experience a year-over-year peak loss of between 15:1% and 19% peaking between September and December 2020, and subsequently to recover with a rebound to pre-crisis levels between May and August 2021. The large impact is the result of an extreme shock to uncertainty occurring at a time of very negative expectations on the economic outlook.
UdgiverInstitut for Økonomi, Aarhus Universitet
Antal sider46
StatusUdgivet - aug. 2020
SerietitelEconomics Working Papers


  • COVID-19, Uncertainty shocks, Non-Linear Structural Vector AutoRegressions, Consumer Confidence

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