The Global Transmission of Real Economic Uncertainty

41 Pages Posted: 14 Jun 2021

See all articles by Juan M. Londono

Juan M. Londono

Board of Governors of the Federal Reserve System

Sai Ma

Board of Governors of the Federal Reserve System

Beth Anne Wilson

Board of Governors of the Federal Reserve System

Date Written: April, 2021

Abstract

Using a sample of 30 countries representing about 65% of the global GDP, we find that real economic uncertainty (REU) has negative long-lasting domestic economic effects and transmits across countries. The international spillover effects of REU are (i) additional to those of domestic REUs, (ii) statistically significant, and (iii) economically meaningful. Trade ties play a key role in explaining why uncertainty generated in one country can affect economic outcomes in other countries. Based on this evidence, we construct a novel index for global REU as the trade-weighted average of all countries' REUs. We disentangle the effects of the domestic and foreign components of global REU and find that, on average, innovations to the foreign component can contribute up to 28% of the future variation in domestic industrial production, with the effect being disproportionately larger on its manufacturing component, the component contributing the most to the tradable goods sector, than on its retail sales component.

JEL Classification: G01, E32, F62, F44

Suggested Citation

Londono-Yarce, Juan-Miguel and Ma, Sai and Wilson, Beth Anne, The Global Transmission of Real Economic Uncertainty (April, 2021). International Finance Discussion Paper No. 1317, Available at SSRN: https://ssrn.com/abstract=3865432 or http://dx.doi.org/10.17016/IFDP.2021.1317

Juan-Miguel Londono-Yarce (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Sai Ma

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2870 (Phone)

HOME PAGE: http://saimaecon.com

Beth Anne Wilson

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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