In this paper we estimate a Bayesian vector autoregressive model with factor
stochastic volatility in the error term to assess the effects of an uncertainty
shock in the Euro area. This allows us to treat macroeconomic uncertainty as a
latent quantity during estimation. Only a limited number of contributions to
the literature estimate uncertainty and its macroeconomic consequences jointly,
and most are based on single country models. We analyze the special case of a
shock restricted to the Euro area, where member states are highly related by
construction. We find significant results of a decrease in real activity for
all countries over a period of roughly a year following an uncertainty shock.
Moreover, equity prices, short-term interest rates and exports tend to decline,
while unemployment levels increase. Dynamic responses across countries differ
slightly in magnitude and duration, with Ireland, Slovakia and Greece
exhibiting different reactions for some macroeconomic fundamentals.Comment: Keywords: Bayesian vector autoregressive models, factor stochastic
volatility, uncertainty shocks; JEL: C30, F41, E3
