International spillover of economic policy uncertainty and its transmission channels: a spatial econometrics method

ABSTRACT

This paper employs a spatial econometrics method to study the international spillovers of economic policy uncertainty (EPU), and contributes to the literature by exploring the transmission channels. We comprehensively consider bilateral trade, financial investment, and information channels (government liability, trade imbalance, fiscal imbalance, business cycle). Based on a large sample of 21 countries from 2001Q1 to 2021Q4, our analysis indicates that the channels proposed are all significantly effective, and bilateral trade contributes the most. We also investigate the dominant channels during five crisis and non-crisis periods: in the global financial crisis, financial investment and government liability similarity are of utmost importance; in European debt crisis, bilateral trade and information channels of government liability and business cycle are the main channels; before these crises, the dominant channel is financial investment, which turned to be bilateral trade in the post-crises period; in COVID-19 pandemic, financial investment is the most important.

KEYWORDS:

• Economic policy uncertainty
• spillover effect
• transmission channel
• spatial econometrics

JEL CLASSIFICATION:

• C33
• D80
• E65
• F42

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Wind is a large-scale data warehouse in China for financial engineering and finance, with financial data and securities data as the core.

² We have conducted sensitivity analyses for the division of different periods. The results show that change of the breakpoint dates does not affect the relative importance of transmission channels.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China (No.72171039, No.71771042), the Fundamental Research Funds for the Central Universities (N2206008) and the Project of Humanities and Social Science of Ministry of Education of China (Grant No.18YJCZH224)