The role of uncertainty, sentiment and cross-country interactions in G7 output dynamics

Output fluctuations in the G7 are characterized using a VAR model of countries actual and expected outputs and uncertainty over these. New measures are developed to quantify the relative importance of economic prospects-versus-uncertainty, global-versus-national effects and fundamentals-versus-sentiment for countries persistent output movements. National and global contributions are found to be equally important across the G7 although considerable differences exist between countries. Uncertainty, and especially cross-country uncertainty, is important in propagating the effects of shocks and generates around 20% of countries persistent output movements on average. Fundamentals dominate output movements although, with an 80:20 split, sentiment plays a non-negligible role.