TY - JOUR
T1 - Fragility and the effect of international uncertainty shocks
AU - Crespo Cuaresma, Jesus
AU - Huber, Florian
AU - Onorante, Luca
PY - 2020
Y1 - 2020
N2 - When economic systems are fragile, even modest shocks, for example a shock to international capital movements, can have strong negative effects on key macroeconomic fundamentals. 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 and shows that uncertainty increases fragility. 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 an international uncertainty shock has negative effects across all economies and variables under consideration, leading to strong declines in output, prices, exports, interest rates and equity prices. The precise degree of fragility varies across countries; a simple correlation exercise suggests that structural differences may be partially responsible for the observed differences.
AB - When economic systems are fragile, even modest shocks, for example a shock to international capital movements, can have strong negative effects on key macroeconomic fundamentals. 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 and shows that uncertainty increases fragility. 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 an international uncertainty shock has negative effects across all economies and variables under consideration, leading to strong declines in output, prices, exports, interest rates and equity prices. The precise degree of fragility varies across countries; a simple correlation exercise suggests that structural differences may be partially responsible for the observed differences.
UR - https://www.sciencedirect.com/science/article/pii/S0261560620300838
U2 - 10.1016/j.jimonfin.2020.102151
DO - 10.1016/j.jimonfin.2020.102151
M3 - Journal article
SN - 0261-5606
VL - 108
SP - 1
EP - 15
JO - Journal of International Money and Finance
JF - Journal of International Money and Finance
IS - 10215
ER -