The International Transmission of Volatility Shocks: An Empirical Analysis

67 Pages Posted: 8 Oct 2012

See all articles by Haroon Mumtaz

Haroon Mumtaz

University of London - School of Sciences

Konstantinos Theodoridis

Cardiff University

Date Written: October 7, 2012


This paper proposes an empirical model which can be used to estimate the impact of changes in the volatility of shocks to US real activity on the UK economy. The proposed empirical model is a structural VAR where the volatility of structural shocks is time varying and is allowed to affect the level of endogenous variables. Using this extended SVAR model we estimate that a one standard deviation increase in the volatility of the shock to US real GDP leads to a decline in UK GDP growth of 0.1% and a 0.1% increase in UK CPI inflation. We then use a non-linear small open economy New Keynesian business cycle model calibrated to US/UK economies to investigate what kind of stochastic volatility shocks can deliver such behaviour. We find that shocks that generate marginal cost uncertainty – such as foreign wage mark-up and productivity stochastic volatility shocks – can reproduce the macroeconomic aggregate responses obtained by the empirical model. An increase in uncertainty, associated with foreign demand shocks on the other hand has a negligible impact on the domestic economy.

Keywords: Stochastic volatility, Gibbs sampling, DSGE model

JEL Classification: F42, C32

Suggested Citation

Mumtaz, Haroon and Theodoridis, Konstantinos, The International Transmission of Volatility Shocks: An Empirical Analysis (October 7, 2012). Bank of England Working Paper No. 463. Available at SSRN: or

Haroon Mumtaz (Contact Author)

University of London - School of Sciences ( email )

London, WC1E 7HX
United Kingdom

Konstantinos Theodoridis

Cardiff University ( email )

Aberconway Building
Colum Drive
Cardiff, Wales CF10 3EU
United Kingdom

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