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Economic Policy Uncertainty Spillovers in Booms and Busts

Author

Listed:
  • Giovanni Caggiano
  • Efrem Castelnuovo
  • Juan Manuel Figueres

Abstract

We estimate a nonlinear VAR to quantify the impact of US economic policy uncertainty shocks on the Canadian unemployment rate in booms and busts. We find strong evidence in favour of asymmetric spillover effects. Unemployment in Canada is shown to react more strongly to uncertainty shocks in economic busts. Such shocks explain about 13% of the variance of the 2‐year ahead forecast error of the Canadian unemployment rate in recessions vs. just 2% during economic booms. Counterfactual simulations point to 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 are also found for the UK economy, whose trade intensity with the US is low. This result is consistent with a transmission channel other than trade behind our findings.

Suggested Citation

  • Giovanni Caggiano & Efrem Castelnuovo & Juan Manuel Figueres, 2020. "Economic Policy Uncertainty Spillovers in Booms and Busts," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 82(1), pages 125-155, February.
    • Handle: RePEc:bla:obuest:v:82:y:2020:i:1:p:125-155
    DOI: 10.1111/obes.12323
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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