The Impact of Global Uncertainty on the Global Economy, and Large Developed and Developing Economies

Kang, Wensheng; Ratti, Ronald A.; Vespignani, Joaquin L.

doi:10.24149/gwp303

Working Paper

The Impact of Global Uncertainty on the Global Economy, and Large Developed and Developing Economies

Abstract: Global uncertainty shocks are associated with a sharp decline in global inflation, global growth and in the global interest rate. Over 1981 to 2014 global financial uncertainty forecasts 18.26% and 14.95% of the variation in global growth and global inflation respectively. Global uncertainty shocks have more protracted, statistically significant and substantial effects on global growth, inflation and interest rate than U.S. uncertainty shocks. U.S. uncertainty lags global uncertainty by one month. When controlling for domestic uncertainty, the decline in output following a rise in global uncertainty is statistically significant in each country, with the exception of the decline for China. The effects for the U.S. and for China are also relatively small. For most economies, a positive shock to global uncertainty has a depressing effect on prices and official interest rates. Exceptions are Brazil, Mexico and Russia, economies with large capital outflows during financial crises. Decomposition of global uncertainty shocks shows that global financial uncertainty shocks are more important than non-financial shocks.

JEL Classification: D80; E44; E66; F62; G10;

https://doi.org/10.24149/gwp303