Economic uncertainty: Firms vs consumers

What is it about?

This paper evaluates the dynamic response of economic activity to shocks in agents’ perception of economic uncertainty. The study focuses on the comparison between manufacturers’ and consumers’ perceptions of economic uncertainty, gauged by a geometric discrepancy indicator to quantify the proportion of disagreement in eleven European countries and the Euro Area. A vector autoregressive framework is used to estimate the impulse response functions to innovations in disagreement, both for manufacturers and consumers.

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Photo by Alice Yamamura on Unsplash

Photo by Alice Yamamura on Unsplash

Why is it important?

The effect on economic activity of shocks to the perception of uncertainty is found to differ markedly between both types of agents. This finding is of particular relevance to researchers when using cross-sectional dispersion of survey-based expectations for approximating and assessing economic uncertainty, since the effect on economic growth of shocks to disagreement may be dependent on the type of agent and the way in which expectations have been elicited. On the one hand, shocks to consumer discrepancy tend to be of greater magnitude and duration than those to manufacturer discrepancy. On the other hand, innovations in disagreement between the two collectives have an opposite effect on economic activity: shocks to manufacturer discrepancy lead to a decrease in economic activity, as opposed to shocks to consumer discrepancy.

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