International effects of euro area versus US policy uncertainty: A FAVAR approach

Arbeitspapier

Building on the growing evidence on the importance of large data sets for empirical macroe-conomic modeling, we estimate a large-scale FAVAR model for 18 OECD member countries. We quantify the global effects of economic policy uncertainty shocks and check whether the signs, the magnitude, and the persistence profile are consistent with the literature on the real and financial sector effects of uncertainty. In that respect, we compare the impacts of a US and a Euro area uncertainty shock. According to our results, an increase in uncertainty has a strong negative impact on economic activity, consumer prices, equity prices and interest rates. Uncertainty shocks cause deeper recessions in Continental Europe (except Germany) than in Anglo-Saxon countries. This pattern is compatible with the view that continental Europe still suffers from institutions which prevent flexible markets. And US uncertainty shocks have a bigger impact than their European counterparts. Uncertainty does not only impact that country where the shock originates but also has large cross-border effects. In that respect, Switzerland turns out to be the most affected non-Euro area European country. We also find a high degree of synchronization among the responses of national variables to a (foreign) uncertainty shock, indicating evidence of an international business cycle. With respect to the responses of nation-al long-term interest rates to an uncertainty shock, our results reveal a strong "North-South" divide within EMU with rates decreasing less significantly in the South. Another important result is that uncertainty shocks emerging in one region quickly raise uncertainty outside the region of origin which appears to be an important transmission channel of uncertainty.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ROME Discussion Paper Series ; No. 17-03

Classification and Topics

• Classification: Wirtschaft ; Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models ; International Policy Coordination and Transmission ; Information, Knowledge, and Uncertainty: General
• Subject: Economic policy uncertainty ; Europe ; FAVAR analysis ; large-scale econometric models ; option value of waiting ; uncertainty effects ; international uncertainty spillovers ; United States

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Belke, Ansgar ; Osowski, Thomas
• Event: Veröffentlichung
• (who): Research On Money in the Economy (ROME)
• (where): s.l.
• (when): 2017

Further information

• Handle: http://hdl.handle.net/10419/187449
• Last update: 10.03.2025, 11:43 AM CET