Measuring international uncertainty

In this paper we propose a large-scale Bayesian VAR model with factor stochastic volatility to investigate the macroeconomic consequences of an international uncertainty shock on the G7 countries. The factor structure in the... [ view full abstract ]

In this paper we propose a large-scale Bayesian VAR model with factor stochastic volatility to investigate the macroeconomic consequences of an international uncertainty shock on the G7 countries. The factor structure in the errors enables us to identify an international uncertainty shock by assuming that it is the factor most correlated with forecast errors related to equity markets . Our findings suggest that the estimated uncertainty factor is strongly related to global equity price volatility, closely tracking other prominent measures commonly adopted to track uncertainty. The dynamic responses of a set of macroeconomic and financial quantities show that an international uncertainty shock exerts a powerful effect on all economies and variables under consideration.