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The international transmission of volatility shocks: an empirical analysis

Author

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  • Mumtaz, Haroon

    (Bank of England)

  • Theodoridis, Konstantinos

    (Reserve Bank of New Zealand)

Abstract

This paper proposes an empirical model which can be used to estimate the impact of changes in the volatility of shocks to US real activity on the UK economy. The proposed empirical model is a structural VAR where the volatility of structural shocks is time varying and is allowed to affect the level of endogenous variables. Using this extended SVAR model we estimate that a one standard deviation increase in the volatility of the shock to US real GDP leads to a decline in UK GDP growth of 0.1% and a 0.1% increase in UK CPI inflation. We then use a non-linear small open economy New Keynesian business cycle model calibrated to US/UK economies to investigate what kind of stochastic volatility shocks can deliver such behaviour. We find that shocks that generate marginal cost uncertainty – such as foreign wage mark-up and productivity stochastic volatility shocks – can reproduce the macroeconomic aggregate responses obtained by the empirical model. An increase in uncertainty, associated with foreign demand shocks on the other hand has a negligible impact on the domestic economy.

Suggested Citation

  • Mumtaz, Haroon & Theodoridis, Konstantinos, 2012. "The international transmission of volatility shocks: an empirical analysis," Bank of England working papers 463, Bank of England.
    • Handle: RePEc:boe:boeewp:0463
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    More about this item

    Keywords

    Stochastic volatility; Gibbs sampling; DSGE model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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