The international transmission of volatility shocks: an empirical analysis

Haroon Mumtaz and Konstantinos Theodoridis

No 463, Bank of England working papers from Bank of England

Abstract: This paper proposes an empirical model which can be used to estimate the impact of changes in the volatility of shocks to US real activity on the UK economy. The proposed empirical model is a structural VAR where the volatility of structural shocks is time varying and is allowed to affect the level of endogenous variables. Using this extended SVAR model we estimate that a one standard deviation increase in the volatility of the shock to US real GDP leads to a decline in UK GDP growth of 0.1% and a 0.1% increase in UK CPI inflation. We then use a non-linear small open economy New Keynesian business cycle model calibrated to US/UK economies to investigate what kind of stochastic volatility shocks can deliver such behaviour. We find that shocks that generate marginal cost uncertainty – such as foreign wage mark-up and productivity stochastic volatility shocks – can reproduce the macroeconomic aggregate responses obtained by the empirical model. An increase in uncertainty, associated with foreign demand shocks on the other hand has a negligible impact on the domestic economy.

Keywords: Stochastic volatility; Gibbs sampling; DSGE model (search for similar items in EconPapers)
JEL-codes: C32 F42 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2012-10-07
New Economics Papers: this item is included in nep-opm
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Citations: View citations in EconPapers (19)

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Related works:
Journal Article: THE INTERNATIONAL TRANSMISSION OF VOLATILITY SHOCKS: AN EMPIRICAL ANALYSIS (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0463

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