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Measuring Firm-Level Uncertainty, Accessible Data
Figure 1. Ex Post Forecast Error as a Measure of Uncertainty
Figure 1 shows the average forecast error for the capacity utilization rate, constructed by regressing the firm ex post forecast error in capacity utilization on yearly dummies, and the associated 95 percent confidence interval. Gray bars denote recession periods, characterized as at least two consecutive quarters of negative GDP growth; the first recession spans 2008Q2-2009Q2, while the second recession covers 2011Q3-2013Q1. For ease of interpretation, we rescaled our uncertainty index by subtracting its original mean and dividing it by its initial standard deviation. After remaining fairly constant during the late 1990s and early 2000s, the ex-post forecast error declined in the mid-2000s, before stepping up in two subsequent periods--first, around the time of the Great Recession and, later, as the European debt crisis heightened.
Figure 2. Comparing Measures of Uncertainty
Figure 2 compares our index to annual measures of Italian and European policy-related economic uncertainty, developed by Baker, Bloom, and Davis (2016) and based on the frequency of newspaper articles regarding policy uncertainty. The measures of economic policy uncertainty (EPU) and our index tend to co-move, recording similar increases in uncertainty during the Great Recession and the European debt crisis. The EPU measures are rescaled by the standard deviation of the average forecast error.
Figure 3. Effects of Uncertainty over time
Figure 3 investigates whether the economic effects of uncertainty are persistent, by looking at the effect of uncertainty at subsequent years. The number of periods on the x-axis is relative to the year in which the shock occurs, denoted as year zero. In the year after the shock materializes, higher uncertainty around the forecast of the capacity utilization rate continues to depress domestic sales, exports, and employment; uncertainty has also a significant effect on future investments. While the effect on sales subsides after two periods, uncertainty continues to weigh on investments and employment. After three years, the uncertainty shock mostly dissipates.