International Spillover Effects of Economic Policy Uncertainty

37 Pages Posted: 18 Apr 2024

See all articles by Alejandro Bernales

Alejandro Bernales

Universidad de Chile

Douglas J. Cumming

Florida Atlantic University - College of Business

Paula Margaretic

Universidad de Chile

Rodrigo Muñoz

Independent

Date Written: April 3, 2024

Abstract

Based on real options theory, we introduce a new conjecture that higher economic policy uncertainty (EPU) in one country negatively affects investments in other countries. More specifically, we expect local firms to be more adversely impacted by higher EPU in neighboring countries due to limited operational flexibility. In contrast, multinational enterprises (MNEs) increase investments in response to EPU shocks in peer markets, especially when well-connected. Irreversible sectors, however, reduce MNEs’ positive response to EPU in close countries. Analyzing data from 9,948 firms globally over 2009-2020 and categorizing firms based on their international network and sectoral irreversibility, the data support these predictions, confirming real options theory in the context of cross-border impacts of EPU.

Keywords: Firms’ Investments, Economic Policy Uncertainty, Multinational Enterprises, Spillover Effects, Irreversible Sectors

JEL Classification: G31, G38, F23

Suggested Citation

Bernales, Alejandro and Cumming, Douglas J. and Margaretic, Paula and Muñoz, Rodrigo, International Spillover Effects of Economic Policy Uncertainty (April 3, 2024). Available at SSRN: https://ssrn.com/abstract=4783396 or http://dx.doi.org/10.2139/ssrn.4783396

Alejandro Bernales

Universidad de Chile ( email )

Diagonal Paraguay 257
Santiago
Chile

HOME PAGE: http://www.alejandrobernales.com

Douglas J. Cumming

Florida Atlantic University - College of Business ( email )

University Tower
220 SE 2 Avenue
Fort Lauderdale, FL 33301
United States

Paula Margaretic (Contact Author)

Universidad de Chile ( email )

Facultad de Economía y Negocios
Departamento de Administración
Chile

Rodrigo Muñoz

Independent ( email )

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