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Assessing International Commonality in Macroeconomic Uncertainty and Its Effects

Author

Listed:
  • Carriero, Andrea

    (Queen Mary University of London)

  • Clark, Todd E.

    (Federal Reserve Bank of Cleveland)

  • Marcellino, Massimiliano

    (Bocconi University, IGIER, and CEPR)

Abstract

This paper uses a large vector autoregression (VAR) to measure international macroeconomic uncertainty and its effects on major economies, using two datasets, one with GDP growth rates for 19 industrialized countries and the other with a larger set of macroeconomic indicators for the U.S., euro area, and U.K. Using basic factor model diagnostics, we first provide evidence of significant commonality in international macroeconomic volatility, with one common factor accounting for strong comovement across economies and variables. We then turn to measuring uncertainty and its effects with a large VAR in which the error volatilities evolve over time according to a factor structure. The volatility of each variable in the system reflects time-varying common (global) components and idiosyncratic components. In this model, global uncertainty is allowed to contemporaneously affect the macroeconomies of the included nations—both the levels and volatilities of the included variables. In this setup, uncertainty and its effects are estimated in a single step within the same model. Our estimates yield new measures of international macroeconomic uncertainty, and indicate that uncertainty shocks (surprise increases) lower GDP and many of its components, adversely affect labor market conditions, lower stock prices, and in some economies lead to an easing of monetary policy.

Suggested Citation

  • Carriero, Andrea & Clark, Todd E. & Marcellino, Massimiliano, 2018. "Assessing International Commonality in Macroeconomic Uncertainty and Its Effects," Working Papers (Old Series) 1803, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwp:1803
    DOI: 10.26509/frbc-wp-201803
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    Cited by:

    1. Jamie L. Cross & Chenghan Hou & Aubrey Poon, 2018. "International Transmission of Macroeconomic Uncertainty in Small Open Economies: An Empirical Approach," Working Papers No 12/2018, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.

    More about this item

    Keywords

    Business cycle uncertainty; stochastic volatility; large datasets;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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