Economic Policy Uncertainty Spillovers in Booms and Busts
AuthorCaggiano, G; Castelnuovo, E; Figueres, JM
Source TitleOxford Bulletin of Economics and Statistics
Melbourne Institute of Applied Economic and Social Research
Document TypeJournal Article
CitationsCaggiano, G., Castelnuovo, E. & Figueres, J. M. (2020). Economic Policy Uncertainty Spillovers in Booms and Busts. Oxford Bulletin of Economics and Statistics, 82 (1), pp.125-155. https://doi.org/10.1111/obes.12323.
Access StatusThis item is embargoed and will be available on 2022-02-01. Access full text via the Open Access location
ARC Grant codeARC/DP160102281
We estimate a nonlinear VAR to quantify the impact of US economic policy uncertainty shocks on the Canadian unemployment rate in booms and busts. We find strong evidence in favour of asymmetric spillover effects. Unemployment in Canada is shown to react more strongly to uncertainty shocks in economic busts. Such shocks explain about 13% of the variance of the 2‐year ahead forecast error of the Canadian unemployment rate in recessions vs. just 2% during economic booms. Counterfactual simulations point to a novel ‘economic policy uncertainty spillovers channel’. According to this channel, jumps in US uncertainty foster economic policy uncertainty in Canada in the first place and, because of the latter, lead to a temporary increase in the Canadian unemployment rate. Evidence of asymmetric spillover effects are also found for the UK economy, whose trade intensity with the US is low. This result is consistent with a transmission channel other than trade behind our findings.
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