Fear Thy Neighbor: Spillovers from Economic Policy Uncertainty

High levels of economic policy uncertainty in various parts of the world revamped the de-bate about its impact on economic activity. With increasingly stronger economic, financial,and political ties among countries, economic agents have more reasons to be vigilant of for-eign economic policy. Employing heterogeneous panel structural vector autoregressions, thispaper tests for spillovers from economic policy uncertainty on other countries' economic ac-tivity. Furthermore, using local...
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High levels of economic policy uncertainty in various parts of the world revamped the de-bate about its impact on economic activity. With increasingly stronger economic, financial,and political ties among countries, economic agents have more reasons to be vigilant of for-eign economic policy. Employing heterogeneous panel structural vector autoregressions, thispaper tests for spillovers from economic policy uncertainty on other countries' economic ac-tivity. Furthermore, using local projections, the paper zooms in on shocks originating in theUnited States, Europe, and China. Our results suggest that economic policy uncertainty re-duces growth in real output, private consumption, and private investment, and that spilloversfrom abroad account for about two-thirds of the negative effect. Moreover, uncertainty in theUnited States, Europe, and China reduces economic activity in the rest of the world, with theeffects being mostly felt in Europe and the Western Hemisphere.