Economic Policy Uncertainty Spillovers in Booms and Busts

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We estimate a nonlinear VAR to quantify the impact of economic policy uncertainty shocks originating in the US on the Canadian unemployment rate in booms and busts. We find strong evidence in favor of asymmetric spillover effects. Unemployment in Canada is shown to react to uncertainty shocks in economic busts only. Such shocks explain about 13% of the variance of the 2-year ahead forecast error of the Canadian unemployment rate in periods of slack vs. just 2% during economic booms. Counterfactual simulations lead to the identification of a novel "economic policy uncertainty spillovers channel". According to this channel, jumps in US uncertainty foster economic policy uncertainty in Canada in the first place and, because of the latter, lead to a temporary increase in the Canadian unemployment rate. Evidence of asymmetric spillover effects due to US EPU shocks are also found for the UK economy. This evidence, which refers to a large economy having a low trade intensity with the US, supports our view that a channel other than trade could be behind our empirical results. Terms of use: Documents inJEL-Codes: C320, E320, E520.

Assessing International Commonality in Macroeconomic Uncertainty and Its Effects

“…policy uncertainty using a large-scale FAVAR model with data for 18 OECD countries. Their results are broadly in line with those of Caggiano, Castelnuovo, and Figueres (2019), in the sense that the e↵ects of both U.S. and E.A. uncertainty shocks are generally negative on all countries, with stronger e↵ects for the former than for the latter, and with uncertainty shocks originating in one country quickly increasing uncertainty in the other countries.…”

“…Other research has focused on the international transmission of policy uncertainty. 1 From a nonlinear (smooth transition) VAR, Caggiano, Castelnuovo, and Figueres (2019) find significant asymmetries, with Canadian (and U.K.) unemployment increasing after a U.S. uncertainty shock in recessions but not expansions. Their interpretation of the results is that higher U.S. policy uncertainty leads to higher uncertainty in Canada and the U.K., and this in turn a↵ects economic activity.…”

Measuring Uncertainty for New Zealand Using Data‐Rich Approach

“…Our measures of uncertainty are likely to capture a combination of domestic and international uncertainty. Uncertainty spillovers at a country‐level have been documented by, among others, Colombo () and Caggiano, Castelnuovo and Figueres (). Hence, one should read the contribution of uncertainty shocks to business cycle fluctuations documented in Table as that of spikes in domestic and international uncertainty.…”

State of Confusion: Economic Policy Uncertainty and International Trade and Investment

“…The strong correlation between the United States, global and Australian measures suggests that US policy uncertainty has significant international spillovers. Similiarly, US economic policy uncertainty has been shown to have significant spillover effects for Canada (Caggiano and Castelnuovo ). Policy uncertainty abroad increases uncertainty in Australia.…”