The spillover effects of US economic policy uncertainty on the global economy: A global VAR approach

Abstract

Uncertainty in general and, more specifically, policy uncertainty have increased substantially after the 2007–2008 global financial crisis. Much of policy uncertainty has stemmed from the US. In this paper, we examine how US policy uncertainty shock spills over to the rest of the world in a global VAR (GVAR) framework. We find that US policy uncertainty shocks are significant in driving the business cycle fluctuations of the world economy. However, the spillovers are heterogeneous across countries, which are determined by the different types of US policy uncertainty (e.g., monetary policy uncertainty versus fiscal policy uncertainty) and the receiving country’s characteristics (e.g., level of development, trade and financial openness, and quality of institutions). The empirical results offer crucial policy implications for both advanced and developing economies. Improving trade and financial openness and institutional quality can help them to mitigate their vulnerability to US policy uncertainty shock.