Department of Economics Working Papers,
Vienna University of Economics and Business, Department of Economics

Abstract: We propose a large-scale Bayesian VAR model with factor stochastic volatility to investigate the macroeconomic consequences of international uncertainty shocks on the G7 countries. The factor structure enables us to identify an international uncertainty shock by assuming that it is the factor most correlated with forecast errors related to equity markets and permits fast sampling of the model. Our findings suggest that the estimated uncertainty factor is strongly related to global equity price volatility, closely tracking other prominent measures commonly adopted to assess global uncertainty. The dynamic responses of a set of macroeconomic and financial variables show that an international uncertainty shock exerts a powerful effect on all economies and variables under consideration.

Keywords: Factor stochastic volatility, vector autoregressive models, global propagation of shocks

JEL-codes: C30; E52; F41; E32 March 2017

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