Working Paper: NBER ID: w25276
Authors: Riccardo Colacito; Mariano Max 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; risk sharing; macroeconomic aggregates; international finance
JEL Codes: F3; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| output volatility (E23) | net exports (F29) |
| output volatility (E23) | output (C67) |
| output volatility shocks (F41) | equity returns (G12) |
| output volatility shocks in one country (F41) | consumption volatility in another country (E20) |
| output volatility passthrough from smaller countries (F69) | consumption volatility in G7 countries (E20) |
| output volatility (E23) | consumption volatility (E20) |