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Global Uncertainty: Measurement and Impact

Paper Session

Friday, Jan. 3, 2020 8:00 AM - 10:00 AM (PST)

Marriott Marquis, Grand Ballroom 13
Hosted By: American Economic Association
  • Chair: Nicholas Bloom, Stanford University

Understanding the Sources of Macroeconomic Uncertainty

Barbara Rossi
,
ICREA and Pompeu Fabra University
Tatevik Sekhposyan
,
Texas A&M University
Matthieu Soupre
,
Pompeu Fabra University

Abstract

We propose a decomposition to distinguish between Knightian uncertainty (ambiguity) and risk, where the first measures the uncertainty about the probability distribution generating the data, while the second measures uncertainty about the odds of the outcomes when the probability distribution is known. We use the Survey of Professional Forecasters (SPF) density forecasts to quantify overall uncertainty as well as the evolution of the different components of uncertainty over time and investigate their importance for macroeconomic fluctuations. We also study the behavior and evolution of the various components of our decomposition in a model that features ambiguity and risk.

Uncertainty and Economic Activity: A Multi-Country Perspective

Ambrogio Cesa-Bianchi
,
Bank of England
M. Hashem Pesaran
,
University of Southern California and University of Cambridge
Alessandro Rebucci
,
Johns Hopkins University

Abstract

This paper develops an asset pricing model with heterogeneous exposure to a persistent world growth factor to identify global growth and financial shocks in a multi-country panel VAR model for the analysis of the relationship between volatility and the business cycle. The econometric estimates yield three sets of empirical results regarding (i) the importance of global growth for the interpretation of the correlation between volatility and growth over the business cycle and the possible presence of omitted variable bias in single-country VARs studies, (ii) the extent to which output shocks drive volatility, and (iii) the transmission of volatility shocks to output growth.

Global Risk Aversion and International Return Comovements

Nancy Xu
,
Boston College

Abstract

This paper establishes three stylized facts about global equity and bond return comovements: Equity return correlations are higher, asymmetric, and countercyclical, whereas bond return correlations are lower, symmetric, and weakly procyclical. A dynamic no-arbitrage asset pricing model is formulated that prices international equities and bonds consistently, and features multiple time-varying global macroeconomic uncertainties and time-varying risk aversion of a global investor. All three stylized facts can be explained by the different sensitivities of equity returns (strongly negative) and bond returns (weakly positive or negative) to global risk aversion shocks. Global risk aversion explains 90% (40%) of the fitted global equity (bond) comovements.

The World Uncertainty Index

Nicholas Bloom
,
Stanford University
Davide Furceri
,
International Monetary Fund
Ahir Hites
,
International Monetary Fund

Abstract

We construct a new index of uncertainty—the World Uncertainty Index (WUI)—for 143 individual countries on a quarterly basis from 1996 onwards. This is defined using the frequency of the word “uncertainty” in the quarterly Economist Intelligence Unit country reports. Globally, the Index spikes near the 9/11 attack, SARS outbreak, Gulf War II, Euro debt crisis, El Niño, European border crisis, UK Brexit vote and the 2016 US election. Uncertainty spikes tend to be more synchronized within advanced economies and between economies with tighter trade and financial linkages. The level of uncertainty is significantly higher in developing countries and is positively associated with economic policy uncertainty and stock market volatility, and negatively with GDP growth. In a panel vector autoregressive setting, we find that innovations in the WUI foreshadow significant declines in output.
Discussant(s)
Davide Furceri
,
International Monetary Fund
Nancy Xu
,
Boston College
Alessandro Rebucci
,
Johns Hopkins University
Barbara Rossi
,
ICREA and Pompeu Fabra University
JEL Classifications
  • F3 - International Finance
  • E3 - Prices, Business Fluctuations, and Cycles