The macroeconomic effects of international uncertainty

Jesus Crespo Cuaresma, Florian Huber and Luca Onorante

No 2302, Working Paper Series from European Central Bank

Abstract: This paper proposes a large-scale Bayesian vector autoregression with factor stochastic volatility to investigate the macroeconomic consequences of international uncertainty shocks in G7 countries. The curse of dimensionality is addressed by means of a global-local shrinkage prior that mimics certain features of the well-known Minnesota prior, yet provides additional flexibility in terms of achieving shrinkage. The factor structure enables us to identify an international uncertainty shock by assuming that it is the joint volatility process that determines the dynamics of the variance-covariance matrix of the common factors. To allow for first and second moment shocks we, moreover, assume that the uncertainty factor enters the VAR equation as an additional regressor. Our findings suggest that the estimated uncertainty measure is strongly connected to global equity price volatility, closely tracking other prominent measures commonly adopted to assess uncertainty. The dynamic responses of a set of macroeconomic and financial variables show that an international uncertainty shock exerts large effects on all economies and variables under consideration. JEL Classification: C30, E52, F41, E32

Keywords: factor stochastic volatility; global propagation of shocks; global uncertainty; vector autoregressive models (search for similar items in EconPapers)
Date: 2019-07
New Economics Papers: this item is included in nep-ets, nep-mac and nep-opm
Note: 412615
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20192302

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