Uncertainty, macroeconomic activity and commodity price: A global analysis

Abstract

We adopt a rich global dataset to extend the conventional forecast-error-based uncertainty measure to the international context and construct a proxy of global macroeconomic uncertainty. Our proxy displays significant independent variations from popular regional or country-specific uncertainty measures, and can serve as an alternative to the global economic policy uncertainty (EPU) index among others when one needs to identify uncertainty shocks at the aggregate global level. We revisit the dynamic effects of uncertainty shocks on macroeconomic variables in a global perspective, and provide two applications of our global uncertainty proxy by linking it to the price formation mechanism of oil and by identifying international uncertainty spillover effects. We show that the well-documented relation between uncertainty and real activities is not only a regional or country-specific issue, but also a global phenomenon. Global macroeconomic uncertainty, which works as aggregate demand shocks, also plays a key role in determining oil prices, as well as driving business cycle fluctuations in a particular economy.