Cross-category spillovers of economic policy uncertainty

This paper analyses the interdependence of policy uncertainty from 1985 to 2017 across six different categories of US economic policy: Monetary, fiscal, healthcare, national security, regulatory, and trade policy. To this end, we apply the Diebold and Yilmaz (2012, 2014) connectedness index methodology to the newspaper-based uncertainty indices developed by Baker et al. (2016). We find that, in total, the category-specific uncertainties are indeed closely interrelated. However, some policy categories are strong net transmitters of uncertainty spillovers (e.g. fiscal policy), while others show only a low degree of average connectedness and are predominantly net receivers (e.g. trade policy). A modified rolling-window approach further reveals that the intensity and direction of spillovers change significantly over time. The total connectedness index not only shows strong bursts related to certain events, but also exhibits a positive long-run trend. The latter is particularly driven by an increasing average connectedness of both healthcare and regulatory policy uncertainty. Finally, we highlight the different characteristics of the uncertainty network across presidential administrations, as well as before and after the most recent election.