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Economic Policy Uncertainty in the Euro Area: Cross-Country Spillovers and Macroeconomic Impact

Volker Clausen, Schlösser Alexander () and Christopher Thiem
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Schlösser Alexander: International Economics, Universitat Duisburg Essen Fachgebiet Volkswirtschaftslehre, Universitätsstraße 12, Essen 45117, Germany

Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), 2019, vol. 239, issue 5-6, 957-981

Abstract: This paper analyzes spillovers and the macroeconomic effects of economic policy uncertainty (EPU) in Europe over the last two decades. Drawing on the newspaper-based uncertainty indices by Baker et al. (2016, Measuring Economic Policy Uncertainty. Quarterly Journal of Economics 131 (4): 1593–1636), we first use the Diebold and Yilmaz (2014 On the Network Topology of Variance Decompositions: Measuring the Connectedness of Financial Firms. Journal of Econometrics 182 (1): 119–134) connectedness index methodology to investigate the static and dynamic patterns of EPU spillovers. We find substantial spillovers across the European countries. Over time, Germany in particular has become increasingly connected to the other economies. In a second step, we investigate the economic impact of EPU shocks using a structural VAR. The detrimental influence of uncertainty turns out to be regime-dependent. We identify a pre-crisis, a crisis and a post-crisis regime, and the effect is only significant in the former two. Finally, the impact of EPU shocks is also heterogeneous across the monetary union’s most important members.

Keywords: economic policy uncertainty; network connectedness; spillovers; variance decomposition; rolling sample VARs; time-varying parameter VARs (search for similar items in EconPapers)
JEL-codes: E32 F45 D80 (search for similar items in EconPapers)
Date: 2019
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