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Common and country specific economic uncertainty

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  • Mumtaz, Haroon
  • Theodoridis, Konstantinos

Abstract

We use a factor model with stochastic volatility to decompose the time-varying variance of macroeconomic and financial variables into contributions from country-specific uncertainty and uncertainty common to all countries. We find that the common component plays an important role in driving the time-varying volatility of nominal and financial variables. The cross-country co-movement in volatility of real and financial variables has increased over time with the common component becoming more important over the last decade. Simulations from a two-country DSGE model featuring Epstein-Zin preferences suggest that increased globalisation and trade openness may be the driving force behind the increased cross-country correlation in volatility.

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  • Mumtaz, Haroon & Theodoridis, Konstantinos, 2017. "Common and country specific economic uncertainty," Journal of International Economics, Elsevier, vol. 105(C), pages 205-216.
    • Handle: RePEc:eee:inecon:v:105:y:2017:i:c:p:205-216
    DOI: 10.1016/j.jinteco.2017.01.007
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    More about this item

    Keywords

    FAVAR; Stochastic volatility; Uncertainty shocks; DSGE model;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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