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Economic Policy Uncertainty Spillovers in Booms and Busts

Author

Listed:
  • Giovanni Caggiano

    (Department of Economics, Monash University; and Department of Economics and Management, University of Padova)

  • Efrem Castelnuovo

    () (Melbourne Institute: Applied Economic and Social Research, The University of Melbourne; Department of Economics, The University of Melbourne; Department of Economics and Management, University of Padova)

  • Juan Manuel Figueres

    (Department of Economics and Management, University of Padova)

Abstract

We estimate a nonlinear VAR to quantify the impact of economic policy uncertainty shocks originating in the US on the Canadian unemployment rate in booms and busts. We find strong evidence in favor of asymmetric spillover effects. Unemployment in Canada is shown to react to uncertainty shocks in economic busts only. Such shocks explain about 13% of the variance of the 2-year ahead forecast error of the Canadian unemployment rate in periods of slack vs. just 2% during economic booms. Counterfactual simulations lead to the identification of a novel “economic policy uncertainty spillovers channel†. According to this channel, jumps in US uncertainty foster economic policy uncertainty in Canada in first place and, because of the latter, lead to a temporary increase in the Canadian unemployment rate. Evidence of asymmetric spillover effects due to US EPU shocks are also found for the UK economy. This evidence, which refers to a large economy having a low trade intensity with the US, supports our view that a channel other than trade could be behind our empirical results.

Suggested Citation

  • Giovanni Caggiano & Efrem Castelnuovo & Juan Manuel Figueres, 2017. "Economic Policy Uncertainty Spillovers in Booms and Busts," Melbourne Institute Working Paper Series wp2017n13, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  • Handle: RePEc:iae:iaewps:wp2017n13
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Economic policy uncertainty shocks; spillover effects; unemployment dynamics; Smooth Transition Vector AutoRegressions; recessions;

    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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