Measuring Macroeconomic Uncertainty: An Application for Iran

Given that the Iranian economy is affected by different fluctuations and innovations, it is important to estimate a measure of macroeconomic uncertainty, which represents aggregate level of uncertainty in economics. This study provides a comprehensive time series measure of macroeconomic uncertainty for Iran, estimated separately for different forecast horizons. Moreover, it provides superior econometric estimate of time-varying macro uncertainty, and considers macro uncertainty movements over the period 1991–2015. The estimated measures of macro uncertainty, base-case and its alternatives, show that the important uncertainty episodes of the Iranian economy are associated with deep recessions. Specifically, the major spikes in the baseline estimate occurred during the 1992:1–1994:1, 1994:3–1995:2, and 2011:3-2013:3 recession periods. Finally, results of impulse responses show that the macro uncertainty innovations are followed by a significant persistent decrease in both investment and production, supporting the findings of long-lived negative effects of uncertainty.