Economic Policy Uncertainty Spillovers in Booms and Busts

57 Pages Posted: 24 May 2017

See all articles by Giovanni Caggiano

Giovanni Caggiano

Department of Economics, Monash University; University of Padua

Efrem Castelnuovo

University of Melbourne - Department of Economics

Juan Manuel Figueres

University of Padua - Department of Economics and Management

Multiple version iconThere are 3 versions of this paper

Date Written: May 23, 2017

Abstract

We estimate a nonlinear VAR to quantify the impact of economic policy uncertainty shocks originating in the US on the Canadian unemployment rate in booms and busts. We find strong evidence in favor of asymmetric spillover effects. Unemployment in Canada is shown to react to uncertainty shocks in economic busts only. Such shocks explain about 13% of the variance of the 2-year ahead forecast error of the Canadian unemployment rate in periods of slack vs. just 2% during economic booms. Counterfactual simulations lead to the identification of a novel “economic policy uncertainty spillovers channel”. According to this channel, jumps in US uncertainty foster economic policy uncertainty in Canada in first place and, because of the latter, lead to a temporary increase in the Canadian unemployment rate. Evidence of asymmetric spillover effects due to US EPU shocks are also found for the UK economy. This evidence, which refers to a large economy having a low trade intensity with the US, supports our view that a channel other than trade could be behind our empirical results.

Keywords: Economic policy uncertainty shocks, spillover effects, unemployment dynamics, Smooth Transition Vector AutoRegressions, recessions

JEL Classification: C32, E32, E52

Suggested Citation

Caggiano, Giovanni and Castelnuovo, Efrem and Figueres, Juan Manuel, Economic Policy Uncertainty Spillovers in Booms and Busts (May 23, 2017). Melbourne Institute Working Paper No. 13/17. Available at SSRN: https://ssrn.com/abstract=2972967 or http://dx.doi.org/10.2139/ssrn.2972967

Giovanni Caggiano

Department of Economics, Monash University ( email )

900 Dandenong Road
Caulfield East, Victoria 3145
Australia

HOME PAGE: http://https://sites.google.com/site/giovannicaggiano72/CV/home

University of Padua ( email )

Via 8 Febbraio, 2
Padova, Vicenza 35122
Italy

Efrem Castelnuovo (Contact Author)

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

HOME PAGE: http://https://sites.google.com/site/efremcastelnuovo/home

Juan Manuel Figueres

University of Padua - Department of Economics and Management ( email )

Via del Santo, 33
Padova, 35123
Italy

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