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Uncertainty and Economic Activity: A Global Perspective

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  • Cesa-Bianchi, Ambrogio
  • Pesaran, M. Hashem
  • Rebucci, Alessandro

Abstract

The 2007-2008 global financial crisis and the subsequent anemic recovery have rekindled academic interest in quantifying the impact of uncertainty on macroeconomic dynamics. This paper studies the interrelation between financial markets volatility and economic activity assuming that both variables are driven by the same set of unobserved common factors and that these factors affect volatility and economic activity with a time lag of at least a quarter. Under these assumptions, the paper analytically shows that volatility is forward looking and that the output equation of a typical VAR estimated in the literature is mis-specified. The paper empirically documents a statistically significant and economically sizable impact of future output growth on current volatility, and no effect of volatility shocks on business cycles, over and above those driven by the common factors. The evidence is interpreted as suggesting that volatility is a symptom rather than a cause of economic instability.

Suggested Citation

  • Cesa-Bianchi, Ambrogio & Pesaran, M. Hashem & Rebucci, Alessandro, 2014. "Uncertainty and Economic Activity: A Global Perspective," IDB Publications (Working Papers) 6605, Inter-American Development Bank.
  • Handle: RePEc:idb:brikps:6605
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    More about this item

    Keywords

    Uncertainty; Business Cycle; Common Factors; Realized volatility; Great Recession; GVAR; Identification;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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