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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Surprise and Uncertainty Indexes: Real-Time Aggregation of Real-Activity Macro Surprises
Chiara Scotti
2013-1093  (November 2013)

Abstract:  I construct two real-time, real activity indexes: (i) a surprise index that summarizes recent economic data surprises and measures optimism/pessimism about the state of the economy, and (ii) an uncertainty index that measures uncertainty related to the state of the economy. The indexes, on a given day, are weighted averages of the surprises or squared surprises from a set of macro releases, where the weights depend on the contribution of the associated real activity indicator to a business condition index a la Aruoba, Diebold, and Scotti (2009). I construct indexes for the United States, Euro Area, the United Kingdom, Canada, Japan. I show that the surprise index preserves the properties of the underlying series in affecting asset prices, with the advantage of being a parsimonious summary measure of real-activity surprises. For the United States, I present the real-activity uncertainty index in relation to other proxies commonly used to measure uncertainty and compare their macroeconomic impact. I find evidence that when uncertainty is strictly related to real activity it has a potentially milder impact on economic activity than when it also relates to the financial sector.

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Dynamic factor model, state space model, forecasting weights

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