Uncertainty and Economic Activity: A Global Perspective
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.
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Format: | Working Papers biblioteca |
Language: | English |
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Inter-American Development Bank
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Subjects: | Production and Business Cycle, Financial Market, Financial Crisis and Structural Adjustement, E44 - Financial Markets and the Macroeconomy, F44 - International Business Cycles, G15 - International Financial Markets, Uncertainty;Business Cycle;Common Factors;Realized volatility;Great Recession;GVAR;Identification, |
Online Access: | http://dx.doi.org/10.18235/0011654 https://publications.iadb.org/en/uncertainty-and-economic-activity-global-perspective |
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dig-bid-node-121182024-05-30T20:30:06ZUncertainty and Economic Activity: A Global Perspective 2014-08-26T00:00:00+0000 http://dx.doi.org/10.18235/0011654 https://publications.iadb.org/en/uncertainty-and-economic-activity-global-perspective Inter-American Development Bank Production and Business Cycle Financial Market Financial Crisis and Structural Adjustement E44 - Financial Markets and the Macroeconomy F44 - International Business Cycles G15 - International Financial Markets Uncertainty;Business Cycle;Common Factors;Realized volatility;Great Recession;GVAR;Identification 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. Inter-American Development Bank Ambrogio Cesa-Bianchi M. Hashem Pesaran Alessandro Rebucci Working Papers application/pdf IDB Publications The Caribbean Latin America en |
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Production and Business Cycle Financial Market Financial Crisis and Structural Adjustement E44 - Financial Markets and the Macroeconomy F44 - International Business Cycles G15 - International Financial Markets Uncertainty;Business Cycle;Common Factors;Realized volatility;Great Recession;GVAR;Identification Production and Business Cycle Financial Market Financial Crisis and Structural Adjustement E44 - Financial Markets and the Macroeconomy F44 - International Business Cycles G15 - International Financial Markets Uncertainty;Business Cycle;Common Factors;Realized volatility;Great Recession;GVAR;Identification |
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Production and Business Cycle Financial Market Financial Crisis and Structural Adjustement E44 - Financial Markets and the Macroeconomy F44 - International Business Cycles G15 - International Financial Markets Uncertainty;Business Cycle;Common Factors;Realized volatility;Great Recession;GVAR;Identification Production and Business Cycle Financial Market Financial Crisis and Structural Adjustement E44 - Financial Markets and the Macroeconomy F44 - International Business Cycles G15 - International Financial Markets Uncertainty;Business Cycle;Common Factors;Realized volatility;Great Recession;GVAR;Identification Inter-American Development Bank Uncertainty and Economic Activity: A Global Perspective |
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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. |
author2 |
Ambrogio Cesa-Bianchi |
author_facet |
Ambrogio Cesa-Bianchi Inter-American Development Bank |
format |
Working Papers |
topic_facet |
Production and Business Cycle Financial Market Financial Crisis and Structural Adjustement E44 - Financial Markets and the Macroeconomy F44 - International Business Cycles G15 - International Financial Markets Uncertainty;Business Cycle;Common Factors;Realized volatility;Great Recession;GVAR;Identification |
author |
Inter-American Development Bank |
author_sort |
Inter-American Development Bank |
title |
Uncertainty and Economic Activity: A Global Perspective |
title_short |
Uncertainty and Economic Activity: A Global Perspective |
title_full |
Uncertainty and Economic Activity: A Global Perspective |
title_fullStr |
Uncertainty and Economic Activity: A Global Perspective |
title_full_unstemmed |
Uncertainty and Economic Activity: A Global Perspective |
title_sort |
uncertainty and economic activity: a global perspective |
publisher |
Inter-American Development Bank |
url |
http://dx.doi.org/10.18235/0011654 https://publications.iadb.org/en/uncertainty-and-economic-activity-global-perspective |
work_keys_str_mv |
AT interamericandevelopmentbank uncertaintyandeconomicactivityaglobalperspective |
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1809107227754102784 |