Common and country-specific uncertainty shocks in europe: Why their nature matters for policy

We decompose the indices of economic policy uncertainty into common and country-specific components and show that only synchronized uncertainty shocks significantly affect Europe’s macroeconomy, while purely national shocks have limited impact. In particular, adverse common uncertainty shocks lead to economic downturns even if central banks aim to offset them by lowering interest rates, and this monetary easing has negligible effects on inflation — implying that common uncertainty acts more like a demand shock than a supply shock. As a result, supporting real activity does not compromise price stability. However, since central banks alone cannot fully offset these synchronized shocks, there is scope for closer policy coordination among European governments and institutions to mitigate the impact of common uncertainty. Our findings emerge from a Bayesian panel VAR analysis identified with sign and zero restrictions and are robust to different samples and identification strategies.