Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/115465 
Year of Publication: 
2014
Series/Report no.: 
IDB Working Paper Series No. IDB-WP-510
Publisher: 
Inter-American Development Bank (IDB), Washington, DC
Abstract: 
The 2007-2008 global financial crisis and the subsequent anemic recovery have rekindled academic interest in quantifying the impact of uncertainty on macroeconomic dynamics. This paper studies the interrelation between financial markets volatility and economic activity assuming that both variables are driven by the same set of unobserved common factors and that these factors affect volatility and economic activity with a time lag of at least a quarter. Under these assumptions, the paper analytically shows that volatility is forward looking and that the output equation of a typical VAR estimated in the literature is mis-specified. The paper empirically documents a statistically significant and economically sizable impact of future output growth on current volatility, and no effect of volatility shocks on business cycles, over and above those driven by the common factors. The evidence is interpreted as suggesting that volatility is a symptom rather than a cause of economic instability.
Subjects: 
Uncertainty
Realized volatility
GVAR
Great Recession
Identification
Business Cycle
Common Factors
JEL: 
E44
F44
G15
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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