Estimating the Effects of Global Uncertainty in Open Economies

Abstract

This paper investigates the effects of a global uncertainty shock in open economies and the role of country relative risk exposure in the transmission of the shock. We employ an Interacted VAR model to take the time- varying dimension of country relative risk exposure into account. Evidence of nonlinearities in the real effects of a global uncertainty shock is found. The reduction in real activity is larger when the country is more exposed to aggregate risk. These findings support recent theoretical contributions on the role of risk exposure in the transmission of uncertainty shocks.