Global uncertainty and the global economy: Decomposing the impact of uncertainty shocks

Wensheng Kang, Ronald Ratti and Joaquin Vespignani

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We constructed a new index of global uncertainty using the first principal component of the stock market volatility for the largest 15 economies. We evaluate the impact of global uncertainty on the global economy using the new global database from Global Economic Indicators (DGEI), Federal Reserve Bank of Dallas. Global uncertainty shocks are less frequent than those observed in data on the U.S. economy. Global uncertainty shocks are associated with a sharp decline in global inflation, global growth and in the global interest rate (based on official/policy interest rates set by central banks). Our decomposition of global uncertainty shocks shows that global financial uncertainty shocks are more important than non-financial shocks. Over the period 1981 to 2014 global financial uncertainty forecasts 18.26% and 14.95% of the variation in global growth and global inflation respectively. The non-financial uncertainty shocks have insignificant effects on global growth. The model for global variables shows more protracted and substantial negative effects of uncertainty on growth and inflation than does a panel model estimating associations of local country-level variables. This outcome is reversed for the effect of uncertainty on official interest rate.

Keywords: Global; Uncertainty shocks; Monetary Policy; FAVAR (search for similar items in EconPapers)
JEL-codes: D80 E44 E66 F62 G10 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2016-06
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (1)

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Working Paper: Global uncertainty and the global economy: Decomposing the impact of uncertainty shocks (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2016-39

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