Macro-uncertainty and financial stress spillovers in the Eurozone

Abstract

This paper studies macro-uncertainty and financial distress spillovers within the Eurozone. We propose a novel methodology to derive the indices of spillovers, by using a Global Vector autoregressive model fitted to data sampled at mixed-frequencies. We find that macro-uncertainty and financial stress are relatively disconnected in the Eurozone. We also show that connectedness between core and periphery Eurozone countries mainly operates through financial stress and it decreases since the outbreak of the Eurozone sovereign debt crisis (with an increasing role played by peripheral countries). As a result, investors and policymakers should monitor separately macro-uncertainty and financial stress. Finally, we find that the mixed-frequency data should be taken into account in this context, otherwise, the spillovers can be underestimated.