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. 2020 Sep:194:109392.
doi: 10.1016/j.econlet.2020.109392. Epub 2020 Jul 7.

The global effects of Covid-19-induced uncertainty

Giovanni Caggiano  1   2 , Efrem Castelnuovo  3   2 , Richard Kima  1
Affiliations

The global effects of Covid-19-induced uncertainty

Giovanni Caggiano et al. Econ Lett. 2020 Sep.

Abstract

We estimate a VAR with world-level variables to simulate the effects of the Covid-19 outbreak-related uncertainty shock. We find a peak (cumulative over one year) negative response of world output of 1.6% (14%).

Keywords: Covid-19; Financial uncertainty; Global financial cycle; Vector autoregressions; World industrial production.

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Figures

Fig. 1
Fig. 1
VIX. Evolution of the S&P500 expected volatility (one-month horizon), daily data.
Fig. 2
Fig. 2
Impulse response functions to the Covid-19 uncertainty shock. Size of the shock: 5 standard deviations of a VIX shock estimated in normal times. Scaling factor computed by considering the jump of the VIX from mid-February to mid-March 2020. Solid line: Point estimates. Dashed lines: 90% confidence interval.
Fig. 3
Fig. 3
World output response to the Covid-19 uncertainty shock. Size of the shock: 5 standard deviations of a VIX shock estimated in normal times. Scaling factor computed by considering the jump of the VIX from mid-February to mid-March 2020. Solid line: Point estimates. Dashed lines: 90% confidence interval related to our baseline VAR. Left panel: Level responses. Right panel: Cumulative responses over 12 months. Models other than the baseline: “12 lags” = trivariate model with 12 lags; “3 lags” = trivariate model with 3 lags; “BiVAR” = bivariate model with VIX and WIP only; “WIP first” = model with WIP ordered before financial indicators; “Mon. pol. shocks” = VARX with Miranda-Agrippino and Rey’s (2020) US monetary policy shocks as exogenous variable; “Oil shocks” = VARX with Baumeister and Hamilton’s (2019) oil supply shocks as exogenous variable; “Set identification” = uncertainty shock identified with a combination of sign and event restrictions, model selected on the basis of a metric built on our constraints. Sample of the analysis with monetary policy shocks: 1990M1–2010M2 due to the availability of Miranda-Agrippino and Rey’s (2020) series of shocks.
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References

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