The Economic Impact of Uncertainty on France, Germany and the United Kingdom

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

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.