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Foreign and Domestic Uncertainty Shocks in Four Open Economies

Author

Listed:
  • Rachatar Nilavongse

    (Tallinn University of Technology
    Linköping University)

  • Michał Rubaszek

    (SGH Warsaw School of Economics)

  • Karsten Staehr

    (Tallinn University of Technology
    Bank of Estonia)

  • Gazi Salah Uddin

    (Linköping University)

Abstract

This paper investigates how the economic performance of four economies with floating exchange rates is affected by shocks in domestic and US economic policy uncertainty. We estimate a Bayesian VAR model describing the dynamics of ten local and US variables for each of the four countries and use it to evaluate the response of the system to structural shocks. The analysis reveals that increased economic uncertainty in the US reduces industrial output in all the countries analysed, while the effect of increased domestic uncertainty varies across the economies. A key finding concerns the role of the exchange rate. Whereas the real effective exchange rate amplifies the effect of uncertainty shocks in the US, it typically helps absorb shocks in the open economies. This asymmetry may reflect the role of the US as a safe haven in times of increased uncertainty.

Suggested Citation

  • Rachatar Nilavongse & Michał Rubaszek & Karsten Staehr & Gazi Salah Uddin, 2021. "Foreign and Domestic Uncertainty Shocks in Four Open Economies," Open Economies Review, Springer, vol. 32(5), pages 933-954, November.
    • Handle: RePEc:kap:openec:v:32:y:2021:i:5:d:10.1007_s11079-021-09656-0
    DOI: 10.1007/s11079-021-09656-0
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    References listed on IDEAS

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    Cited by:

    1. Niels Gillmann & Ostap Okhrin, 2023. "Adaptive local VAR for dynamic economic policy uncertainty spillover," Papers 2302.02808, arXiv.org.

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    More about this item

    Keywords

    Economic policy uncertainty; Foreign and domestic shocks; Real exchange rate;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • F2 - International Economics - - International Factor Movements and International Business

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