![]() ![]() We identify the factors by imposing restrictions on the cross-country correlation of volatility and output growth, consistent with a multicountry version of the Lucas (1978) tree model. To interpret these stylized facts, we specify a factor-augmented multicountry panel VAR. We also observe that this cross-country correlation is much stronger for volatility than for output growth. We begin with the empirical observation that realized volatility and output growth are closely correlated not only within countries but also across countries. Here, we base our empirical analysis on realized stock market volatility as a measure of uncertainty and adopt a multicountry perspective. Theory, therefore, does not provide a definite guidance on how to interpret the observed negative correlation between output growth and uncertainty measures. ![]() ![]() Examples based on information and financial frictions include Van Nieuwerburgh and Veldkamp (2006), Fostel and Geanakoplos (2012), Kozlowski et al. Indeed, the theoretical literature highlights mechanisms through which adverse economic conditions can trigger spikes in uncertainty. But it is also possible that uncertainty responds to fluctuations in economic activity or other unobserved effects. From a theoretical standpoint, uncertainty can cause economic activity to slowdown and even contract through a variety of mechanisms, both on the household side via precautionary savings ( Kimball 1990) and on the firm side via investment delays or other frictions (see, for instance, Bernanke 1983 Dixit and Pindyck 1994 and, more recently, Bloom 2009 Basu and Bundick 2017, among many others). 1 Interpreting correlations is always problematic, as causation can run in either directions. Empirical measures of uncertainty behave countercyclically in the United States and in most other countries. ![]()
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