Measuring uncertainty and assessing its predictive power in the euro area

Abstract

Expectations and uncertainty play a key role in economic behavior. This paper deals with both, expectations and uncertainty derived from the European Central Bank Survey of Professional Forecasters. Given the strong turbulences that the euro area macroeconomic indicators observe since 2007, the aim of the paper is to check whether there is any room for improvement of the consensus forecast accuracy for GDP growth and inflation when accounting for uncertainty. We propose a new measure of uncertainty, alternative to the ad hoc equal weights commonly used, based on principal components. We test the role of uncertainty in forecasting macroeconomic performance in the euro area between 2005 and 2015. We also check the role of surprises in the considered forecasting sample.