Working Paper: CEPR ID: DP13325
Authors: Riccardo Colacito; Mariano Massimiliano Croce; Yang Liu; Ivan Shaliastovich
Abstract: We develop a novel measure of volatility pass-through to assess international propagation of output volatility shocks to macroeconomic aggregates, equity prices, and currencies. An increase in country’s output volatility is associated with a decrease in its output, consumption, and net exports. The average consumption pass-through is 50% (a 1% increase in output volatility increases consumption volatility by 0.5%) and it increases to 70% for shocks originating in smaller countries. The equity volatility pass-through is 90%, whereas the link between volatility of currency and fundamentals is weak. A novel channel of risk sharing of volatility risks can explain our empirical findings.
Keywords: volatility passthrough; foreign exchange; disconnect; risk sharing
JEL Codes: C62; F31; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in output volatility (E32) | Decrease in output (E23) |
| Increase in output volatility (E32) | Decrease in consumption (E21) |
| Increase in output volatility (E32) | Decrease in net exports (F69) |
| Increase in output volatility (E32) | Increase in consumption volatility (D19) |
| Increase in output volatility (from smaller countries) (F69) | Increase in consumption volatility (D19) |
| Increase in output volatility (E32) | Increase in equity volatility (G19) |
| Currency volatility (F31) | Weak link with macroeconomic fundamentals (E19) |