[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/idb/brikps/6605.html
   My bibliography  Save this paper

Uncertainty and Economic Activity: A Global Perspective

Author

Listed:
  • Cesa-Bianchi, Ambrogio
  • Pesaran, M. Hashem
  • Rebucci, Alessandro
Abstract
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.

Suggested Citation

  • Cesa-Bianchi, Ambrogio & Pesaran, M. Hashem & Rebucci, Alessandro, 2014. "Uncertainty and Economic Activity: A Global Perspective," IDB Publications (Working Papers) 6605, Inter-American Development Bank.
    • Handle: RePEc:idb:brikps:6605
    as

    Download full text from publisher

    File URL: https://publications.iadb.org/publications/english/document/Uncertainty-and-Economic-Activity-A-Global-Perspective.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Pesaran, M. Hashem & Shin, Yongcheol & Smith, Richard J., 2000. "Structural analysis of vector error correction models with exogenous I(1) variables," Journal of Econometrics, Elsevier, vol. 97(2), pages 293-343, August.
    2. Hideaki Hirata & M. Ayhan Kose & Chris Otrok, "undated". "Regionalization vs. Globalization," Working Paper 164456, Harvard University OpenScholar.
    3. John Y. Campbell & Martin Lettau & Burton G. Malkiel & Yexiao Xu, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, February.
    4. Natalia Bailey & George Kapetanios & M. Hashem Pesaran, 2016. "Exponent of Cross‐Sectional Dependence: Estimation and Inference," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(6), pages 929-960, September.
    5. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta†Eksten & Stephen J. Terry, 2018. "Really Uncertain Business Cycles," Econometrica, Econometric Society, vol. 86(3), pages 1031-1065, May.
    6. Caldara, Dario & Fuentes-Albero, Cristina & Gilchrist, Simon & Zakrajšek, Egon, 2016. "The macroeconomic impact of financial and uncertainty shocks," European Economic Review, Elsevier, vol. 88(C), pages 185-207.
    7. Hideaki Hirata & M. Ayhan Kose & Christopher Otrok & Marco E Terrones, 2013. "Global House Price Fluctuations: Synchronization and Determinants," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 9(1), pages 119-166.
    8. Jesus Fernandez-Villaverde & Pablo Guerron-Quintana & Juan F. Rubio-Ramirez & Martin Uribe, 2011. "Risk Matters: The Real Effects of Volatility Shocks," American Economic Review, American Economic Association, vol. 101(6), pages 2530-2561, October.
    9. Filippo di Mauro & L. Vanessa Smith & Stephane Dees & M. Hashem Pesaran, 2007. "Exploring the international linkages of the euro area: a global VAR analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(1), pages 1-38.
    10. Fostel, Ana & Geanakoplos, John, 2012. "Why does bad news increase volatility and decrease leverage?," Journal of Economic Theory, Elsevier, vol. 147(2), pages 501-525.
    11. Andersen, Torben G & Bollerslev, Tim, 1997. "Heterogeneous Information Arrivals and Return Volatility Dynamics: Uncovering the Long-Run in High Frequency Returns," Journal of Finance, American Finance Association, vol. 52(3), pages 975-1005, July.
    12. Adina Popescu & Frank Rafael Smets, 2010. "Uncertainty, Risk-taking, and the Business Cycle in Germany," CESifo Economic Studies, CESifo Group, vol. 56(4), pages 596-626, December.
    13. Can Tian, 2012. "Riskiness Choice and Endogenous Productivity Dispersion over the Business Cycle," PIER Working Paper Archive 12-025, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    14. Chudik, Alexander & Pesaran, M. Hashem, 2011. "Infinite-dimensional VARs and factor models," Journal of Econometrics, Elsevier, vol. 163(1), pages 4-22, July.
    15. Harbo, Ingrid, et al, 1998. "Asymptotic Inference on Cointegrating Rank in Partial Systems," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 388-399, October.
    16. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
    17. Baker, Scott R. & Bloom, Nicholas, 2013. "Does uncertainty reduce growth? Using disasters as natural experiments," LSE Research Online Documents on Economics 121906, London School of Economics and Political Science, LSE Library.
    18. Ryan A. Decker & Pablo N. D'Erasmo & Hernan Moscoso Boedo, 2016. "Market Exposure and Endogenous Firm Volatility over the Business Cycle," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(1), pages 148-198, January.
    19. Ben S. Bernanke, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(1), pages 85-106.
    20. repec:bla:jfinan:v:44:y:1989:i:5:p:1115-53 is not listed on IDEAS
    21. Alexander Chudik & M. Hashem Pesaran & Elisa Tosetti, 2011. "Weak and strong cross‐section dependence and estimation of large panels," Econometrics Journal, Royal Economic Society, vol. 14(1), pages 45-90, February.
    22. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    23. Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2014. "Risk Shocks," American Economic Review, American Economic Association, vol. 104(1), pages 27-65, January.
    24. Victor Zarnowitz & Louis A. Lambros, 1983. "Consensus and Uncertainty in Economic Prediction," NBER Working Papers 1171, National Bureau of Economic Research, Inc.
    25. Nick Bloom & Stephen Bond & John Van Reenen, 2007. "Uncertainty and Investment Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(2), pages 391-415.
    26. Fabienne Comte & Eric Renault, 1998. "Long memory in continuous‐time stochastic volatility models," Mathematical Finance, Wiley Blackwell, vol. 8(4), pages 291-323, October.
    27. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    28. Leahy, John V & Whited, Toni M, 1996. "The Effect of Uncertainty on Investment: Some Stylized Facts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 64-83, February.
    29. Baillie, Richard T. & Bollerslev, Tim & Mikkelsen, Hans Ole, 1996. "Fractionally integrated generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 74(1), pages 3-30, September.
    30. Pesaran M.H. & Schuermann T. & Weiner S.M., 2004. "Modeling Regional Interdependencies Using a Global Error-Correcting Macroeconometric Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 129-162, April.
    31. Ruediger Bachmann & Giuseppe Moscarini, 2011. "Business Cycles and Endogenous Uncertainty," 2011 Meeting Papers 36, Society for Economic Dynamics.
    32. R?diger Bachmann & Steffen Elstner & Eric R. Sims, 2013. "Uncertainty and Economic Activity: Evidence from Business Survey Data," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(2), pages 217-249, April.
    33. Stephane Dees & M. Hashem Pesaran & L. Vanessa Smith & Ron P. Smith, 2014. "Constructing Multi-Country Rational Expectations Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 76(6), pages 812-840, December.
    34. M. Ayhan Kose & Christopher Otrok & Charles H. Whiteman, 2003. "International Business Cycles: World, Region, and Country-Specific Factors," American Economic Review, American Economic Association, vol. 93(4), pages 1216-1239, September.
    35. Favero, Carlo A & Pesaran, M Hashem & Sharma, Sunil, 1994. "A Duration Model of Irreversible Oil Investment: Theory and Empirical Evidence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 9(S), pages 95-112, Suppl. De.
    36. Haroon Mumtaz & Paolo Surico, 2018. "Policy uncertainty and aggregate fluctuations," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 33(3), pages 319-331, April.
    37. Ole E. Barndorff-Nielsen & Neil Shephard, 2002. "Estimating quadratic variation using realized variance," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(5), pages 457-477.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ambrogio Cesa-Bianchi & M. Hashem Pesaran & Alessandro Rebucci, 2014. "Uncertainty and Economic Activity: A Global Perspective," CESifo Working Paper Series 4736, CESifo Group Munich.
    2. Ambrogio Cesa-Bianchi & M Hashem Pesaran & Alessandro Rebucci & Stijn Van Nieuwerburgh, 2020. "Uncertainty and Economic Activity: A Multicountry Perspective," The Review of Financial Studies, Society for Financial Studies, vol. 33(8), pages 3393-3445.
    3. N. Bloom, 2016. "Fluctuations in uncertainty," Voprosy Ekonomiki, NP Voprosy Ekonomiki, issue 4.
    4. Saygin Sahinoz & Evren Erdogan Cosar, 2020. "Quantifying uncertainty and identifying its impacts on the Turkish economy," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 47(2), pages 365-387, May.
    5. Jesus Fernandez-Villaverde & Pablo Guerron-Quintana, 2020. "Uncertainty Shocks and Business Cycle Research," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 118-166, August.
    6. Kıvanç Karaman, K. & Yıldırım-Karaman, Seçil, 2019. "How does financial development alter the impact of uncertainty?," Journal of Banking & Finance, Elsevier, vol. 102(C), pages 33-42.
    7. Scott R Baker & Nicholas Bloom & Stephen J Terry, 2024. "Using Disasters to Estimate the Impact of Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(2), pages 720-747.
    8. Scott R. Baker & Nicholas Bloom, 2013. "Does Uncertainty Reduce Growth? Using Disasters as Natural Experiments," NBER Working Papers 19475, National Bureau of Economic Research, Inc.
    9. Lastauskas, Povilas & Nguyen, Anh Dinh Minh, 2023. "Global impacts of US monetary policy uncertainty shocks," Journal of International Economics, Elsevier, vol. 145(C).
    10. Cesa-Bianchi, Ambrogio & Fernandez-Corugedo, Emilio, 2014. "Uncertainty in a model with credit frictions," Bank of England working papers 496, Bank of England.
    11. Choi, Sangyup & Furceri, Davide & Huang, Yi & Loungani, Prakash, 2018. "Aggregate uncertainty and sectoral productivity growth: The role of credit constraints," Journal of International Money and Finance, Elsevier, vol. 88(C), pages 314-330.
    12. Mecikovsky, Ariel & Meier, Matthias, 2014. "Do plants freeze upon uncertainty shocks?," EconStor Preprints 100662, ZBW - Leibniz Information Centre for Economics.
    13. Iván Alfaro & Nicholas Bloom & Xiaoji Lin, 2024. "The Finance Uncertainty Multiplier," Journal of Political Economy, University of Chicago Press, vol. 132(2), pages 577-615.
    14. Mehkari, M. Saif, 2016. "Uncertainty shocks in a model with mean-variance frontiers and endogenous technology choices," Journal of Macroeconomics, Elsevier, vol. 49(C), pages 71-98.
    15. Panagiotidis, Theodore & Printzis, Panagiotis, 2020. "What is the investment loss due to uncertainty?," Global Finance Journal, Elsevier, vol. 45(C).
    16. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta†Eksten & Stephen J. Terry, 2018. "Really Uncertain Business Cycles," Econometrica, Econometric Society, vol. 86(3), pages 1031-1065, May.
    17. Shinohara, Takeshi & Okuda, Tatsushi & Nakajima, Jouchi, 2021. "Characteristics of Uncertainty Indices in the Macroeconomy," Economic Review, Hitotsubashi University, vol. 72(3), pages 246-267, July.
    18. Bhanu Pratap & Nalin Priyaranjan, 2023. "Macroeconomic effects of uncertainty: a Google trends-based analysis for India," Empirical Economics, Springer, vol. 65(4), pages 1599-1625, October.
    19. Cesa-Bianchi, Ambrogio, 2013. "Housing cycles and macroeconomic fluctuations: A global perspective," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 215-238.
    20. Lee, Seohyun, 2017. "Three essays on uncertainty: real and financial effects of uncertainty shocks," MPRA Paper 83617, University Library of Munich, Germany.

    More about this item

    Keywords

    Uncertainty; Business Cycle; Common Factors; Realized volatility; Great Recession; GVAR; Identification;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:idb:brikps:6605. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Felipe Herrera Library (email available below). General contact details of provider: https://edirc.repec.org/data/iadbbus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.