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Foreign economic policy uncertainty shocks and real activity in the Euro area

Filippo Arigoni and Črt Lenarčič
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Filippo Arigoni: Central Bank of Ireland

No 7/RT/23, Research Technical Papers from Central Bank of Ireland

Abstract: This paper estimates a Bayesian VAR model on Euro area data and quantifies the reaction of real activity to economic policy uncertainty shocks that originate abroad. Our findings show that US and Chinese uncertainty explains larger shares of fluctuations than European uncertainty. In an extended set-up, we perform a counterfactual simulation and verify the presence of a foreign economic policy uncertainty spillovers channel that magnifies the real effects of US and Chinese uncertainty shocks. The simulation also documents a non-negligible role played by bilateral trading activities in the transmission mechanism of Chinese shocks. In an application with Dutch data, we highlight that structural domestic factors shape region and country-specific uncertainty in the propagation of foreign economic policy uncertainty shocks onto the economy.

Keywords: Uncertainty shocks; Euro area spillovers; real activity; US; China; Bayesian VAR. (search for similar items in EconPapers)
JEL-codes: C32 E30 Q54 (search for similar items in EconPapers)
Date: 2023-08
New Economics Papers: this item is included in nep-eec, nep-int and nep-opm
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