Working Paper

Assessing International Commonality in Macroeconomic Uncertainty and Its Effects

Abstract: This paper uses a large vector autoregression to measure international macroeconomic uncertainty and its effects on major economies. We provide evidence of significant commonality in macroeconomic volatility, with one common factor driving strong comovement across economies and variables. We measure uncertainty and its effects with a large model in which the error volatilities feature a factor structure containing time-varying global components and idiosyncratic components. Global uncertainty contemporaneously affects both the levels and volatilities of the included variables. Our new estimates of international macroeconomic uncertainty indicate that surprise increases in uncertainty reduce output and stock prices, adversely affect labor market conditions, and in some economies lead to an easing of monetary policy.

Keywords: Bayesian Methods; Stochastic Volatility; identification; Endogeneity; Uncertainty;

JEL Classification: C11; C32; D81; E32;

https://doi.org/10.26509/frbc-wp-201803r

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers

Publication Date: 2019-09-05

Number: 18-03R

Note: First version March 2018