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

Wensheng, Kang and Ratti, Ronald and Vespignani, Joaquin (2017): Impact of Global Uncertainty on the Global Economy and Large Developed and Developing Economies.

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Abstract

Global uncertainty shocks are associated with a sharp decline in global inflation, growth and interest rate. From 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 exhibit more protracted, statistically significant and substantial effects on the 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 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, which represent 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.

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