Regime-Dependent Effects of Uncertainty Shocks. A Markov-Switching Approach for Central Eastern European Countries

Over the past decades, the Central Eastern European (CEE) economies have experienced events characterized by a high degree of uncertainty that have had adverse and persistent effects at the macroeconomic level. This paper analyzes the asymmetric effects of uncertainty shocks (alternately defined by a financial stress index and implied volatility) in two distinct regimes. Structural sudden regime shifts from a high-volatility regime to a low-volatility one are modeled using Markov-switching vector autoregressive models with sign restrictions, given that the probability transition matrix is either time-invariant or time-variant. Our results on key macroeconomic monthly indicators (industrial production, inflation, interest rate) suggest that uncertainty shocks produce significant short-term effects on industrial production and inflation, slightly different in these two regimes, along with a persistent effect on the interest rate.