The Global Effects of Global Risk and Uncertainty
Posted: 1 Jun 2020
Date Written: May 22, 2020
Abstract
In this paper, we analyse the effects of a shock to global financial uncertainty and risk aversion on real economic activity. To this end, we extract a common factor from the realised volatilities of about 1,000 risky asset returns from around the world. We then study how shocks to the factor affect economic activity in 44 advanced and emerging small open economies by estimating local projections in a panel regression framework. We find that the output responses are quite heterogeneous across countries but, in general, negative and persistent. Furthermore, the effects of shocks to the global factor are stronger in countries with a higher degree of trade and/or financial openness, as well as in countries with a higher level of vulnerabilities.
Keywords: Global uncertainty, global risk aversion, global financial cycle, small open economies
JEL Classification: F41, E32, F65
Suggested Citation: Suggested Citation
