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Faculty of Economics

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Pesaran, H., Cesa-Bianchi, A. and Rebucci, A.

Uncertainty and Economic Activity: A Global Perspective

CWPE1407

Abstract: The 2007-2008 global _financial crisis and the subsequent anemic recovery have rekindled academic interest in quantifying the impact of uncertainty on further assume that these common factors affect volatility and economic activity with a time lag of at least a quarter. Under these assumptions, we show analytically that volatility is forward looking and that the output equation of a typical VAR estimated in the literature is mis-specified as least squares estimates of this equation are inconsistent. Empirically, we document 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. We interpret this evidence as suggesting that volatility is a symptom rather than a cause of economic instability.

Keywords: Uncertainty, Realized volatility, GVAR, Great Recession, Identification,Business Cycle, Common Factors

JEL Codes: E44 F44 G15

Author links: M. Hashem Pesaran  

PDF: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1407.pdf

Open Access Link: https://doi.org/10.17863/CAM.4957