Global Uncertainty and the Global Economy: Decomposing the Impact of Uncertainty Shocks

41 Pages Posted: 28 Jun 2016

See all articles by Wensheng Kang

Wensheng Kang

Ronald A. Ratti

Western Sydney University - Department of Economics & Finance

Joaquin Vespignani

University of Tasmania - School of Economics and Finance

Date Written: June 26, 2016

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

JEL Classification: D80, E44, E66, F62, G10

Suggested Citation

Kang, Wensheng and Ratti, Ronald A. and Vespignani, Joaquin, Global Uncertainty and the Global Economy: Decomposing the Impact of Uncertainty Shocks (June 26, 2016). CAMA Working Paper No. 39/2016 . Available at SSRN: https://ssrn.com/abstract=2800849 or http://dx.doi.org/10.2139/ssrn.2800849

Ronald A. Ratti

Western Sydney University - Department of Economics & Finance ( email )

Sydney, NSW 1797
Australia

Joaquin Vespignani (Contact Author)

University of Tasmania - School of Economics and Finance ( email )

Commerce Building,
Sandy Bay Campus
Sandy Bay, TAS, Tasmania 7005
Australia

No contact information is available for Wensheng Kang

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