Economic Policy Uncertainty in the Euro Area: Cross-Country Spillovers and Macroeconomic Impact

Abstract

This paper analyzes spillovers and the macroeconomic effects of economic policy uncertainty (EPU) in Europe over the last two decades. Drawing on the newspaper-based uncertainty indices by Baker et al. (2016, Measuring Economic Policy Uncertainty. Quarterly Journal of Economics 131 (4): 1593–1636), we first use the Diebold and Yilmaz (2014 On the Network Topology of Variance Decompositions: Measuring the Connectedness of Financial Firms. Journal of Econometrics 182 (1): 119–134) connectedness index methodology to investigate the static and dynamic patterns of EPU spillovers. We find substantial spillovers across the European countries. Over time, Germany in particular has become increasingly connected to the other economies. In a second step, we investigate the economic impact of EPU shocks using a structural VAR. The detrimental influence of uncertainty turns out to be regime-dependent. We identify a pre-crisis, a crisis and a post-crisis regime, and the effect is only significant in the former two. Finally, the impact of EPU shocks is also heterogeneous across the monetary union’s most important members.

Asymmetric effects of policy uncertainty on real sector variables in emerging markets: evidence from Brazil, India, China and South Africa

“…Binge and Boshoff (2020) also found that uncertainty impacts negatively on real GDP growth in South Africa. Contrary to these studies, Dey (2017) established significant positive effect of uncertainty on the real economy in India, while Volker et al. (2019) found that in Europe, policy uncertainty impacts heterogeneously across the countries.…”

“…Binge and Boshoff (2020) also found that uncertainty impacts negatively on real GDP growth in South Africa. Contrary to these studies, Dey (2017) established significant positive effect of uncertainty on the real economy in India, while Volker et al (2019) found that in Europe, policy uncertainty impacts heterogeneously across the countries. Istiak and Serletis (2018) studied the G7 economies and found that the responses of real output to changes in economic policy uncertainty shocks are country-specific.…”

Is the Eurozone an Optimum Currency Area?

“…The southern countries -Greece, Portugal, Spain and Italydid not become more resistant to economic shocks and did not move to a hopeful growth trajectory. During the crisis years, the euro caused the biggest damage in the weakest eurozone countries and widened the income disparities among member countries (Clausen, Schlösser, Thiem 2019).…”