Fear thy neighbor: Spillovers from economic policy uncertainty

Abstract

AbstractHigh levels of economic policy uncertainty (EPU) in various parts of the world revamped the debate about its impact on economic activity. Employing heterogeneous panel structural vector autoregressions, we test for EPU spillovers on other countries’ economic activity. EPU reduces growth in real output, private consumption, and private investment, with spillovers from abroad accounting for about two‐thirds of the effect. Using local projections, we show that EPU surges in the United States, Europe, and China reduce economic activity in the rest of the world, with the effects being mostly felt in Europe and the Western Hemisphere.