On the aggregate effects of global uncertainty: Evidence from an emerging economy

Abstract

This paper empirically examines the aggregate effects of global uncertainty using monthly South African data. The empirical analysis is implemented in the context of vector autoregressions (VAR), augmented with various proxies for economic and financial indicators. The evidence shows that global uncertainty shocks are a significant source of economic fluctuations—they are estimated to significantly explain the cyclical downturn and exert negative impact on the financial and stock markets. These results are consistent with the view that uncertainty shocks are an important exogenous source of cyclical fluctuations and the reactions in the financial market play an important role in the impact of uncertainty shocks on the real economy. The evidence shows that uncertainty is important to the inflation dynamics while inflation and output co-move negatively conditional on uncertainty shocks.