The Impact of Global Uncertainty on the Global Economy, and Large Developed and Developing Economies

47 Pages Posted: 31 Jan 2017  

Wensheng Kang

Kent State University - Department of Economics

Ronald A. Ratti

Western Sydney University - Department of Economics & Finance

Joaquin L. Vespignani

University of Tasmania - School of Economics and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January 30, 2017

Abstract

Global uncertainty shocks are associated with a sharp decline in global inflation, global growth and in the global interest rate. Over 1981 to 2014 global financial uncertainty forecasts 18.26% and 14.95% of the variation in global growth and global inflation respectively. Global uncertainty shocks have more protracted, statistically significant and substantial effects on global growth, inflation and interest rate than U.S. uncertainty shocks. U.S. uncertainty lags global uncertainty by one month. When controlling for domestic uncertainty, the decline in output following a rise in global uncertainty is statistically significant in each country, with the exception of the decline for China. The effects for the U.S. and for China are also relatively small. For most economies, a positive shock to global uncertainty has a depressing effect on prices and official interest rates. Exceptions are Brazil, Mexico and Russia, economies with large capital outflows during financial crises. Decomposition of global uncertainty shocks shows that global financial uncertainty shocks are more important than non-financial shocks.

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 L., The Impact of Global Uncertainty on the Global Economy, and Large Developed and Developing Economies (January 30, 2017). CAMA Working Paper No. 9/2017 . Available at SSRN: https://ssrn.com/abstract=2908591 or http://dx.doi.org/10.2139/ssrn.2908591

Wensheng Kang

Kent State University - Department of Economics ( email )

Kent, OH 44242
United States

Ronald A. Ratti

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

Sydney, NSW 1797
Australia

Joaquin L. Vespignani (Contact Author)

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

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

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