Economic policy uncertainty in the US: Does it matter for the Euro area?

• Published in: Economics letters Vol. 121; no. 1; pp. 39 - 42
• Main Author: Colombo, Valentina
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01-10-2013; Elsevier Science Ltd
• Subjects: Business cycles; Eastern Europe; Economic policy; Economic policy uncertainty; Eurozone; Industrial production; Macroeconomics; Price indexes; Regression analysis; Structural vector autoregressions; Studies; U.S.A; Uncertainty; US–Euro area spillovers; Vector-autoregressive models; Western Europe; United States > US; Europe; E52; Structural vector autoregressions; Economic policy uncertainty; E32; F42; US–Euro area spillovers
• ISSN: 0165-1765; 1873-7374
• DOI: 10.1016/j.econlet.2013.06.024

We investigate the effects of a US economic policy uncertainty shock on some Euro area macroeconomic aggregates via Structural VARs. We model the indicators of economic policy uncertainty recently developed by  Baker et al. (2013) jointly with the aggregate price indexes and alternative indicators of the business cycle for the two above indicated economic areas. According to our SVARs, a one standard deviation shock to US economic policy uncertainty leads to a statistically significant fall in the European industrial production and prices of −0.12% and −0.06%, respectively. The contribution of the US uncertainty shock on the European aggregates is shown to be quantitatively larger than the one exerted by an Euro area-specific uncertainty shock.
•We quantify the possible spillovers going from the US to the Euro area economics.•We focus on shocks to the US economic policy uncertainty.•We document a negative and significant reaction of Euro area price and quantity indicators.•The contribution of US uncertainty shock is estimated to be larger than that of a Euro-area specific uncertainty shock.