# **IV.3 Empirical Results**

This section presents the main empirical results. First, I present the estimates of the global GDP factor that measures global economic activity and discuss its importance for fluctuations in output across countries based on the methodology in Section IV.2.1. Then, I report the results obtained from the FAVAR framework in Section IV.2.2 that show the impact of U.S. energy shocks on global economic activity. In particular, I present impulse responses of the global GDP factor to changes in U.S. oil supply and energy efficiency. Moreover, I investigate two specific historical episodes to evaluate the contribution of unanticipated improvements in U.S. shale technology and energy efficiency on global economic activity. Finally, I present results that illustrate how the impact of U.S. energy shocks differs across countries that are advanced economy net oil importers, emerging market net oil importers, and net oil exporters.

## **IV.3.1 Common Factors of Global and Regional Economic Activity**

Figure 2 plots the median, alongside the 16- and 84-percent quantiles, for the posterior distribution of the estimated global GDP factor over the period 1980:Q4-2019:Q4. The tightness of the 16- and 84-percent quantile bands indicates that the factor is estimated precisely. Because the factor is latent and we simply observe an estimate based on its hypothesized relationships with the observed data, its interpretation requires special attention. In particular, a closer look at Figure 2 indicates that the factor peaks and declines around key historical world economic and financial events, suggesting its suitability as a measure of global economic activity. For example, the factor declines during the three global recessions experienced by the world economy over the past four decades: in 1982, 1991, and 2009. Also, the decline is largest during the 2007-09 global financial crisis, followed by the global recessions of 1982 and 1991, respectively. In this way, it accurately captures the relative severity of the three recessions, with the 2007-09 global financial crisis being the deepest and the 1991 global recession being the mildest. Moreover, it also captures periods of global expansions such as post-1991 and post-2009.<sup>18</sup> The factor registers a decline in 2001 when the U.S. economy went through a recession, while global economic activity experienced slow growth. Because the U.S. economy has a relatively large influence on global economy activity, it is no surprise that the global GDP factor picks up changes in U.S. GDP. However, is the estimated factor merely a stand in for fluctuations in U.S. economic activity? Figure 3 (top) plots the global GDP factor alongside a common factor estimated using GDP growth rates for 32 countries that exclude U.S. GDP data. The plot shows that the two common factors, estimated with and without U.S. data, move closely together; the correlation is 0.94. Moreover, the respective median factor loading for the Unites States is 0.46, indicating that the U.S. contribution to the global GDP factor is sizeable but not dominant.<sup>19</sup> Moreover, in

> 18See Kose, Sugawara, & Terrones (2020) for identification of global economic recessions and expansions since early 1950s.

> 19Note that the common factor estimated without U.S. GDP data may still pick up changes in U.S. economic activity that spillover to other countries. A more detailed assessment of whether the fluctuations in the global GDP factor capture broad-based changes in economic activity across countries can be seen in Figure 13, Appendix VII.1. Factor loadings are in Figure 12, Appendix VII.1.

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