Haroon Mumtaz , Queen Mary University of London Alberto Musso , European Central Bank
September 1, 2018
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We develop a dynamic factor model with time-varying parameters and stochastic volatility, estimate it with several variables for a large number of countries and decompose the variance of each variable in terms of contributions from uncertainty common to all countries (global uncertainty), region-specific uncertainty and country-specific uncertainty. Among other findings, the estimates suggest that global uncertainty plays a primary role in explaining the volatility of inflation, interest rates and stock prices, although to a varying extent over time, while all uncertainty components are found to play a non-negligible role for real economic activity, credit and money for most countries.
J.E.L classification codes: C15,C32, E32
Keywords:Dynamic Factor Model, Time-Varying Parameters, Stochastic Volatility, Uncertainty Shocks, Global Uncertainty