International Transmission of Macroeconomic Uncertainty in Small Open Economies: An Empirical Approach

In the new CAMP working paper 12/2018, Cross, Hou and Poon estimate the effects of domestic and international sources of macroeconomic uncertainty in three small open economy inflation targeting countries: Australia, Canada and New Zealand.

Their main result is that international uncertainty spill-overs shape the macroeconomic conditions in all small open economies. The general mechanism is that international uncertainty shocks reduce real GDP, while raising inflation and interest rates. Domestic uncertainty shocks are found to have a similar effect on inflation and interest rates, however the real GDP responses are idiosyncratic. In particular, the transmission of domestic uncertainty shocks is found to be negative in Canada and positive in New Zealand, while the Australian response is initially negative and becomes positive over time. Finally, in a forecasting exercise, they show that accounting for macroeconomic uncertainty via their model specification provides more accurate point and density forecasts compared to commonly used benchmarks.

12

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s