Fear Thy Neighbor: Spillovers from Economic Policy Uncertainty
IMF Working Papers, November 15, 2017
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- Fear Thy Neighbor: Spillovers from Economic Policy Uncertainty
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Bibliographic details
- Authors: Nina Biljanovska, Francesco Grigoli, Martina Hengge
- Published: November 15, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484325032.001
Overview
- High levels of economic policy uncertainty (EPU) in various parts of the world prompted renewed debate about its impact on economic activity.
- With stronger economic, financial, and political ties among countries, economic agents are increasingly attentive to foreign economic policy.
- The paper examines spillovers from EPU on other countries' economic activity and focuses on shocks originating in the United States, Europe, and China.
Methods
- Employs heterogeneous panel structural vector autoregressions (SVARs) to test for spillovers from EPU to other countries' economic activity.
- Uses local projections to analyze responses to EPU shocks originating in the United States, Europe, and China.
Key Findings
- Economic policy uncertainty reduces growth in:
- real output
- private consumption
- private investment
- Spillovers from abroad account for about two-thirds of the negative effect.
- Uncertainty originating in the United States, Europe, and China reduces economic activity in the rest of the world.
- Geographic distribution of spillover severity:
- Effects are mostly felt in Europe and the Western Hemisphere.
Policy Implications and Interpretation
- Because a large share of the negative impact of domestic EPU operates through foreign spillovers, policy coordination and awareness of international transmission channels are important.
- Monitoring and mitigating EPU in major economies (United States, Europe, China) can have substantial benefits for global economic activity, particularly for Europe and the Western Hemisphere.
Source: Fear Thy Neighbor: Spillovers from Economic Policy Uncertainty, IMF Working Paper No. 2017/240.
Content in this bundle
- Fear Thy Neighbor: Spillovers from Economic Policy Uncertainty, WP/17/240, November 2017