Department of Economics and Business Economics

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

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  • Giovanni Pellegrino
  • Federico Ravenna, Danmarks Nationalbank, University of Copenhagen, HEC, Montréal
  • ,
  • Gabriel Züllig, University of Copenhagen, 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.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages46
Publication statusPublished - Aug 2020
SeriesEconomics Working Papers
Number2020-12

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