Macroeconomic Uncertainty in Disruptive Times

In a modern world characterized by frequent economic shocks, technological disruptions, and geopolitical uncertainty, it is imperative that policymakers, businesses, and investors understand macroeconomic uncertainty. This paper tracks macroeconomic uncertainty over the years in some EU countries from 1997-2024 using a data set that includes economic policy uncertainty indices, GDP growth rates, inflation, interest rates and labor market dynamics. We use VAR models and impulse response functions to study the effects of uncertainty shocks on macroeconomic aggregates. We find that there is considerable variation in how EU economies react to uncertainty, with small and open economies being more volatile. Also, we investigate how various economic crises like the global financial crisis of 2008, the eurozone debt crisis, COVID-19, and the current geopolitical tensions have increased uncertainty and changed the transmission mechanisms of macroeconomic shocks. Combining the findings from behavioral economics, we review the role of decision-making biases in economic forecasting and policy making. This paper presents evidence on the trends and consequences of macroeconomic uncertainty over the long-run and recommends policies to change effects and enhance economic opportunities in an environment of growing economic uncertainty.