Global and Country‐Specific Output Growth Uncertainty and Macroeconomic Performance
| Date | 01 October 2016 |
| Published date | 01 October 2016 |
| DOI | http://doi.org/10.1111/obes.12118 |
694
©2015 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd.
OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 78, 5 (2016) 0305–9049
doi: 10.1111/obes.12118
Global and Country-Specific Output Growth
Uncertainty and Macroeconomic Performance*
Tino Berger†, Sibylle Grabert‡ and Bernd Kempa§
†Department of Economics, University of Goettingen, Platz der Goettinger Sieben 3,
Goettingen 37073, Germany (e-mail: tino.berger@wiwi.uni-goettingen.de)
‡Federal Ministry for Economic Affairs and Energy, Scharnhorststr, 34-37, Berlin 10115,
Germany (e-mail: sibylle.grabert@bmwi.bund.de)
§Department of Economics, University of Muenster, Universitaetsstr. 14-16 Muenster,
48143, Germany (e-mail: bernd.kempa@uni-muenster.de)
Abstract
We identify global and country-specific measures of output growth uncertainty for a large
OECD country sample by means of a dynamic factor model with stochastic volatility.We
find evidence for major bouts of global uncertainty in the early 1970s and late 2000s, and a
number of periods with elevated levelsof either global or national uncer tainty, particularly
in the early 1980s, 1990s and 2000s. VAR impulse responses of national macroeconomic
variablesto our estimated measures of uncer tainty revealthat global uncertainty is the major
driver of macroeconomic performance in most countries, whereas the impact of national
uncertainty is small and frequently insignificant. We also find that uncertainty is transmitted
primarily through investmentand trade flows rather than through consumption demand.
I. Introduction
The notion of economic uncertainty as a source of macroeconomic fluctuations is associ-
ated most prominently with the writings of John Maynard Keynes.Renewed interest in the
potential links between uncertainty and macroeconomic performance and their quantitative
importance has spawned a recent and blossoming literature based on rigorous theoretic and
empirical modeling. However, so far this literature mostly focuses on the national rather
than the global dimension of uncertainty. In this paper, we identify global and country-
specific measures of output growth uncertainty for a large OECD country sample by means
of a dynamic factor model (DFM) with stochastic volatility. We find evidence for major
bouts of global uncertainty in the early 1970s and late 2000s, and a number of periods with
elevatedlevels of either global or national uncertainty, particularly in the early 1980s, 1990s
and 2000s. VAR impulse responses of national macroeconomic variables to our estimated
JEL Classification numbers: C32, E32, F44
*The sole responsibility for the content of this paper lies with the authors. It does not necessarily reflect the opinion
of the German Federal Ministry for Economic Affairs and Energy.
Global macroeconomic uncertainty 695
measures of uncertainty reveal that global uncertainty is the major driver of macroeconomic
performance in most countries, whereas the impact of national uncertainty is small and fre-
quently insignificant. We also find that uncertainty is transmitted primarily through invest-
ment and trade flows rather than through consumption demand in most sample countries.
A growing literature investigates the potential links between macroeconomic uncer-
tainty and economic performance. One strand of that literature uses GARCH models to
proxy macroeconomic uncertainty by the conditional variance of unanticipated shocks to
the time series of inflation and output growth (e.g. Grier and Perry, 1996; Shields et al.,
2005; Fountas and Karanasos, 2007).These papers detect one-way or two-way causal rela-
tionships between many of the possible bilateral combinations of inflation, output growth
and their respective second moments. In particular, increased growth uncertainty is fre-
quently found to cause significantly lower average growth rates (Grier et al., 2004; Bredin
and Fountas, 2009).
A different strand of recent literature uses firm-level data with a focus on analysing the
impact of uncertainty shocks on the real economy (see e.g. Bloom, 2009; Arellano, Bai and
Kehoe, 2012; Bloom et al., 2012; Christiano, Motto and Rostagno, 2014). Following up on
the theory of investment under uncertainty (e.g. Dixit and Pindyck, 1994), this literature
identifies real-options effects as an important transmission channel of uncertainty on the
real economy.1The real-options effect is associated with irreversibility in investment,
implying that heightened uncertainty makes firms more cautious about hiring and investing,
and consumers more cautious about buying durables. In an influential study using US data
Bloom (2009) finds that macroeconomic uncertainty shocks generate recessions because
a higher uncertainty causes firms to temporarily suspend investment and hiring. Carri`ere-
Swallow and C´espedes (2013) report similar evidence of adverse effects of uncertainty on
investmentand consumption for a large sample consisting of both developed and developing
countries.
A number of studies provide theoretical arguments and empirical evidence for an anal-
ogous uncertainty effect on international trade flows. Handley (2014) and Handley and
Lim˜ao (2012) show that with sunk costs of entry, trade policy uncertainty raises the real-
options value of waiting to enter export markets. Novy and Taylor (2014) provide an
explanation for the global trade collapse of 2008–09 by considering a model in which fixed
costs of ordering lets firms hold an inventory of imported intermediates. In their framework,
uncertainty shocks induce firms to cut their orders of foreign intermediates disproportion-
ately strongly, thereby inducing bigger contractions in international trade flows compared
to domestic economic activity.
A common feature of the literature cited above is their sole focus on the national in-
cidence of uncertainty in individual countries. So far, almost no attempt has been made
to differentiate between its national and global dimensions.2Yet global uncertainty may
1Some studies also allow for reverse causation, in whichuncer tainty is endogenouslyinfluenced by first-moment
business cycle shocks (e.g. Van Nieuwerburgh andVeldkamp, 2006; Bachmann and Moscarini, 2012; D’Erasmo and
Moscoso-Boedo, 2013).
2To the best of our knowledge,there are only two exceptions. Nakamura, Sergeyev and Steinsson (2012) identify
a world stochastic volatility process using over 100 years of consumption data across a large sample of countries.
However, their focus is not so much on macroeconomic performance, but rather on explaining a number of asset
pricing anomalies. The other paper being that of Gourio, Siemer and Verdelhan (2013) who analyse variousaspects
©2015 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd
To continue reading
Request your trial