Identifying uncertainty shocks using world diffusion index

ABSTRACT

In this study, a world diffusion index is developed to measure how uncertainty shocks have diffused among 179 economies and caused contractions in the world growth cycles. This index is simply defined as the percentage share of the number of expanding countries. It identifies four uncertainty shocks: the oil crisis of 1973; the bursting of the information technology bubble in 2000; the credit crunch of 2007; and the European debt crisis of 2010. To overcome the problem of data unavailability in emerging market economies, the annual GDP values of 179 economies are transformed through temporal disaggregation, and the dating of quarterly growth cycles is implemented as per the OECD method. The empirical findings indicate that each of the uncertainty shocks caused severe contractions in the advanced economies but that the emerging market economies experienced such contractions only during the credit crunch of 2007. Policy implications are also discussed.