Foreign economic policy uncertainty shocks and real activity in the Euro area

Arigoni, Filippo and Lenarčič, Črt (2023): Foreign economic policy uncertainty shocks and real activity in the Euro area.

Abstract

This paper estimates a Bayesian VAR model on Euro area data and quantifies the reaction of real activity to economic policy uncertainty shocks that originate abroad. Our findings show that US and Chinese uncertainty explains larger shares of fluctuations than European uncertainty. In an extended set-up, we perform a counterfactual simulation and verify the presence of a foreign economic policy uncertainty spillovers channel that magnifies the real effects of US and Chinese uncertainty shocks. The simulation also documents a non-negligible role played by bilateral trading activities in the transmission mechanism of Chinese shocks. In an application with Dutch data, we highlight that structural domestic factors shape region and country-specific uncertainty in the propagation of foreign economic policy uncertainty shocks onto the economy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Uncertainty shocks, Euro area spillovers, real activity, US, China, Bayesian VAR
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q54 - Climate ; Natural Disasters and Their Management ; Global Warming

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