Uncertainty spill-overs: When policy and financial realms overlap

Arbeitspapier

No matter its source, financial- or policy-related, uncertainty can feed onto itself, concealing its true origin and leading to identification challenges in empirical applications. We add to the existing stock of analytical methods able to disentangle among various types of uncertainty shocks, by generalising an identification approach based on magnitude restrictions to a multi-country setting. Within the Euro Area, we find evidence of sizable spill-overs arising from country-specific uncertainty shocks, with financial realm being a more important source than the policy realm. By leveraging on the flexibility of our identification strategy, we quantify the valuation 'mistakes' that arise from the inability to separate uncertainty shock types within a given country; we then show that the implicit under/over-valuations can be related to some simple cross-sectional indicators of financial and political stability, especially before the 2008/2009 crisis. A comparison between the responses of sovereign yields within and outside the Euro Area suggests strong within institutional arrangements and risk-sharing mechanisms that can blur the thin separation line between uncertainty shock types. In this context, we find that ECB reacted to those identified uncertainty shocks with the highest potential to spill over abroad, thus filling a leadership vacuum within the Euro Area.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Quaderni - Working Paper DSE ; No. 1174

Classification and Topics

• Classification: Wirtschaft ; Central Banks and Their Policies ; Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General ; Financial Aspects of Economic Integration ; Macroeconomic Aspects of International Trade and Finance: General
• Subject: policy uncertainty ; financial integration ; global VAR ; unconventional monetary policy

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bacchiocchi, Emanuele ; Dragomirescu-Gaina, Catalin
• Event: Veröffentlichung
• (who): Alma Mater Studiorum - Università di Bologna, Dipartimento di Scienze Economiche (DSE)
• (where): Bologna
• (when): 2022

Further information

• DOI: doi:10.6092/unibo/amsacta/6983
• Handle: http://hdl.handle.net/10419/282296
• Last update: 10.03.2025, 11:42 AM CET