Macroeconomic Forecast Uncertainty in the Euro Area

This paper estimates aggregate measures of macroeconomic uncertainty from individual density forecasts by professional forecasters. The methodology used in the paper improves on the existing literature along two dimensions. Firstly, it controls for changes to the composition of the panel of respondents to the survey. And secondly, it assigns more weight to the information submitted by forecasters with better forecasting performance. Using data from the European Central Bank's Survey of Professional Forecasters from 1999 Q1 to 2014 Q3, the paper finds that the effects of changes in the composition of the panel on aggregate uncertainty can be large in a statistical and economic sense. It also finds that the estimates of aggregate uncertainty that use performance-based weights differ significantly from the simple averages used in the literature and their dynamics are more consistent with the dynamics displayed by the estimates of uncertainty computed from financial indicators.