On the International Spillover Effects of Uncertainty

In this paper, we add to the literature studying the effects of uncertainty. We focus on the effects of economic policy uncertainty across borders. In contrast to the existing literature, we focus on the time-varying correlation structure of economic policy uncertainty across countries and with macroeconomic variables. We employ a multivariate GARCH model to estimate the time-varying conditional covariance matrix. Our results show that they are relevant, vary sizably over time, and that spikes in the time series can be related to policy events. We find relevant spillover effects of policy uncertainty in other countries on the US economy. We find that policy uncertainty and spillover effects are lowest in China, but that during the Global Financial Crisis substantial spillovers existed. Our results have implications for macroeconomic policymaking, financial stability policies, asset allocations, and risk assessment modelling.