Macroeconomic uncertainty or how predictable is the economy?

In this report we develop a general measure of macroeconomic uncertainty in the euro area . While u ncertainty is not immediately observable - and there exists no t the one generally accepted measure - we derive our measure of uncertainty based on whether the economy has become more or less predictable . Higher unpredictability equals in our measure higher uncertainty. Uncertainty is a key macroeconomic variable as an increase in uncertainty can depress hiring, investment or consumption. On the contrary, prolonged periods of low levels of uncertainty might lead to overconfidence which potentially induces over-indebtedness, overinvestment and excessive risk-taking. Our results show that macroeconomic uncertainty in the euro area has been rising since March 2018 , driven by political events such as Brexit and trade war. It has now reache d its highest level in seven years (since the beginning of 2013) pointing to an increasing risk to the economy from uncertainty .