Job market paper
We extract a global factor from cross-country output growth and find that its fluctuations are typically small, with unconditional volatility estimated at 0.06%, but highly persistent, with estimated persistence at 0.99. The data indicate that the volatility of the global factor varies over time and that these movements in global macroeconomic risk are an important driver of international business cycles. Our empirical results suggest that the exposure to the global factor is not homogeneous across countries and such heterogeneity enables countries to share global volatility risk. We show that a theoretical framework in which agents fear model misspecification can successfully replicate the volatility-driven dynamics observed in the data.