Global Long-run Risk and International Business Cycles: A Factor-Stochastic Volatility Approach

We extract a global factor from cross-country output growth since 1960. We find that the fluctuations of the global factor are typically small, with the annualized unconditional volatility estimated at 0.06%, but highly persistent, with estimated persistence at 0.98. Evidence of time variation in the volatility of the global factor is overwhelming as there are times in which volatility could be several times larger than its unconditional level (about ten times in the aftermath of the 2008 financial crisis). We provide evidence that the exposure to the global factor is not homogeneous across countries and that countries share global long-run risk and propose a theoretical framework that rationalizes the dynamics of macroeconomic quantities and prices observed in the data.