International Transmission of Macroeconomic Uncertainty in Small Open Economies: An Empirical Approach

We propose a vector autoregression with common stochastic volatility in mean (VAR-CSVM) dynamics to estimate the transmission of domestic and international sources of macroeconomic uncertainty shocks in three small open economies (SOEs): Australia, Canada, and New Zealand. We find evidence that international uncertainty spillovers shape the macroeconomic conditions in all three SOEs; that domestic uncertainty shocks have idiosyncratic transmission mechanisms in each SOE; and that accounting for uncertainty within the VAR-CSVM improves point and density forecast accuracy compared to the nested VAR-CSV and homoscedastic VAR models.