The Global Transmission of Real Economic Uncertainty

Abstract

Using a sample of 30 countries representing about 65% of the global GDP, we find that real economic uncertainty (REU) has negative long-lasting domestic economic effects and transmits across countries. The international spillover effects of REU are (i) additional to those of domestic REUs, (ii) statistically significant, and (iii) economically meaningful. Trade ties play a key role in explaining why uncertainty generated in one country can affect economic outcomes in other countries. Based on this evidence, we construct a novel index for global REU as the trade-weighted average of all countries' REUs. We disentangle the effects of the domestic and foreign components of global REU and find that, on average, innovations to the foreign component can contribute up to 28% of the future variation in domestic industrial production, with the effect being disproportionately larger on its manufacturing component, the component contributing the most to the tradable goods sector, than on its retail sales component.