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Good and bad uncertainty propagation across the global economy

16th National Competition for Economic Research Grants

International economics

Senior Researcher : Helena Chuliá Soler

Research Centre or Institution : Universidad de Barcelona.

Abstract

The main objective of the project is to explore the effects of uncertainty shocks on the real and financial markets. To do this, we distinguish y between ‘bad’ uncertainty, related to bad news in the market (i.e. negative growth, financial losses, destabilizing political events, etc.) and ‘good’ uncertainty related to good news in the market (i.e. technological innovation, financial gains, etc.).

First, we have answered the following question: How does capital market integration impact on consumption risk sharing? Our results show that the answer depends on the decomposition of capital market integration into “good” and “bad” integration. To reach this conclusion, we propose new measures of countries’ capital market integration, based on “good” and “bad” volatility shocks, as well as country specific indices of consumption risk sharing. Results show that, while there is a decoupling of individual consumption growth from global risk-sharing after episodes of “bad” integration, we observe a recoupling after “good” integration. Therefore, the risk-sharing benefits of international financial integration are more apparent in “good times”.

Second, we have conduct a comprehensive empirical examination of the effects of uncertainty on real and financial markets by distinguishing not only between ‘bad’ uncertainty and ‘good’ uncertainty, but also between ‘expected’ and ‘unexpected’ uncertainty. We decompose total uncertainty into two parts: first an expected component, which proxies for the amount of variation that agents can anticipate for a given variable of interest, and an unexpected component, which is related to the amount of the variation that agents cannot predict. We show that indeed the notion of ‘uncertainty’, that is often empirically assimilated to a conditional second moment of economic activity (or its expectation), is more related to the notion of what we identify here as “bad unexpected uncertainty”. Other general notions of uncertainty, like expected “good” and “bad” uncertainty or unexpected “good” uncertainty, impact the economic activity in a variety of ways that do not always coincide with theoretical models.

 

Scientific Production
 
Magazine Articles 2
Communications at national conferences 3
Communications at international conferences 6

 

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