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Global uncertainty and the global economy: decomposing the impact of uncertainty shocks


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Kang, W, Ratti, R and Vespignani, JL 2016 , Global uncertainty and the global economy: decomposing the impact of uncertainty shocks.

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We constructed a new index of global uncertainty using the first principal component of the
stock market volatility for the largest 15 economies. We evaluate the impact of global
uncertainty on the global economy using the new global database from Global Economic
Indicators (DGEI), Federal Reserve Bank of Dallas. Global uncertainty shocks are less
frequent than those observed in data on the U.S. economy. Global uncertainty shocks are
associated with a sharp decline in global inflation, global growth and in the global interest
rate (based on official/policy interest rates set by central banks). Our decomposition of global
uncertainty shocks shows that global financial uncertainty shocks are more important than
non-financial shocks. Over the period 1981 to 2014 global financial uncertainty forecasts
18.26% and 14.95% of the variation in global growth and global inflation respectively. The
non-financial uncertainty shocks have insignificant effects on global growth. The model for
global variables shows more protracted and substantial negative effects of uncertainty on
growth and inflation than does a panel model estimating associations of local country-level
variables. This outcome is reversed for the effect of uncertainty on official interest rate.

Item Type: Report (Discussion Paper)
Authors/Creators:Kang, W and Ratti, R and Vespignani, JL
Keywords: global, uncertainty shccks, monetary policy, FAVAR
Publisher: University of Tasmania
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