The Economic Policy Uncertainty Spillovers of the UK on its top Trading Partners

Abstract

AbstractThe paper investigates on the spillovers effect of the Economic Policy Uncertainty of the UK (UK’s EPU) on its top trading partners by applying panel regression with robustness checks and Vector Error Correction Model with causality test. The paper aims to clarify the UK’s EPU impact compared to the USA in a lot of empirical research to fill in the research gap of EPU spillovers from UK’s perspective, which is neglected in the past despite its meaningfulness. By considering an updated data over 1997Q1–2019Q4 covering the UK’s significant events, for instance, Brexit, the paper found that UK’s EPU has a robust positive impact on the trading partners’ EPU; However, the impact ratio is lower than the empirical research of USA, just about one-third. This result is ensured by causality test and several robustness checks, including an introduction of a novel instrument for the main interest, UK’s EPU. Assessing the previous UK’s EPU and adjusting the trade openness can alleviate the volatility of trading partners’ EPU caused by UK’s EPU. Interestingly, more trade openness to the UK helps stabilize the host countries’ economic policy and reduce the unique effects of UK’s EPU on the host countries’ EPU.KeywordsEconomic Policy UncertaintyUKTrade OpennessPanel VECMRobustnessInstrument