The International Effects of US Uncertainty

Abstract

We propose domestic uncertainty shocks may serve as a channel through which business cycles are transmitted internationally. To quantify uncertainty, we use two measures from the current literature and estimate vector autoregressions to evaluate the effects US uncertainty shocks have on the Japanese and British economies. Our results suggest that US uncertainty shocks have international effects consistent with a demand shock in the context of an open-economy aggregate demand and aggregate supply model with sticky prices.

Time-Varying impact of uncertainty shocks on macroeconomic variables of the united kingdom: Evidence from over 150 years of monthly data

“…Then we analyse the impact of the shock to stock market volatility on the variables of our concern in the TVP-VAR model. Again our results, as reported in Figure 3, are in line with those derived under the corporate bond spread shock, though the effects are relatively less aligned (particularly for the unemployment rate) with theory of uncertainty shocks being aggregate demand shocks (and also less pronounced, as in Jones and Olson, 2015)). This result possibly suggests that the stock market volatility is a comparatively less accurate measure of uncertainty than the corporate bond spread.…”

“…Our model includes four macroeconomic variables: unemployment rate, the month-on-month inflation rate based on the Wholesale Price Index (WPI), the Bank rate capturing monetary policy, the US dollar to UK pound exchange rate, and the metric for uncertainty. Following, Gilchrist et al, (2014), Jones and Olson (2015), Caldara et al, (2016), and Gupta et al, (forthcoming), and availability of data, we use the corporate bond spread, i.e., the difference between the yields of corporate and government bonds, as our measure of uncertainty. 4 Our sample period covers 1855:01 to 2016:12, and the database is available for downloadable from: https://www.bankofengland.co.uk/statistics/research-datasets.…”

Financial firm bankruptcies, international stock markets, and investor sentiment

“…This paper explores an area of research that, to the best of our knowledge, is novel. In addition, Jones and Olson (2015) find that U.S. uncertainty shocks induce significant declines in foreign exports and interest rates and cause foreign currencies to appreciate relative to the dollar. There are several reasons to expect a negative reaction of the international stock markets after such announcements.…”

“…Similar evidence has also been found by Cornell (1982) among others. In addition, Jones and Olson (2015) find that U.S. uncertainty shocks induce significant declines in foreign exports and interest rates and cause foreign currencies to appreciate relative to the dollar. Moreover, Becker, Finnerty, and Friedman (1995) find that U.K. equities respond within half an hour following U.S. macroeconomic releases, suggesting that investors react to public information originating from the United States.…”

The impact of terrorist attacks in G7 countries on international stock markets and the role of investor sentiment

“…In contrast, the consensus is to examine how shocks only from the US are transmitted to other countries (see, for instance,Samarakoon, [2011],Jones and Olson [2015] andPapakyriakou et al [2018]).…”