Economic Policy Uncertainty Spillovers in Booms and Busts

31 Pages Posted: 2 Jun 2020

See all articles by Giovanni Caggiano

Giovanni Caggiano

Department of Economics, Monash University; University of Padova

Efrem Castelnuovo

University of Melbourne - Department of Economics; University of Padova - Department of Economics

Juan Manuel Figueres

University of Padova - Department of Economics and Management; European Central Bank (ECB)

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Date Written: February 2020

Abstract

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.

Suggested Citation

Caggiano, Giovanni and Castelnuovo, Efrem and Figueres, Juan Manuel, Economic Policy Uncertainty Spillovers in Booms and Busts (February 2020). Oxford Bulletin of Economics and Statistics, Vol. 82, Issue 1, pp. 125-155, 2020, Available at SSRN: https://ssrn.com/abstract=3615236 or http://dx.doi.org/10.1111/obes.12323

Giovanni Caggiano (Contact Author)

Department of Economics, Monash University ( email )

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Australia

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

University of Padova ( email )

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Italy

Efrem Castelnuovo

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

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

University of Padova - Department of Economics

via Del Santo 33
Padova, 35123
Italy

Juan Manuel Figueres

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

Via del Santo, 33
Padova, 35123
Italy

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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