Economic policy uncertainty in US and Europe: time-varying Granger causality

ABSTRACT

This study provides insights into the linkage between the policy uncertainty index of the United States (US) and Europe based on the time-varying causality approach. We also consider the variability of these indices derived from the ARFIMA-GARCH models. Our findings indicate a prevailing causality running from US uncertainty to both European and European variability of uncertainty. The results are in line with some theoretical models that associate macroeconomic uncertainty and international spillover effects.

KEYWORDS:

• Uncertainty
• time-varying Granger causality
• persistence
• GARCH models

JEL CLASSIFICATION:

• C22
• C59
• F41
• F42

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

¹ As summarized in Bloom (2014), economic theory offers explanation for four mechanisms through which recessions might increase economic uncertainty. They are briefly outlined as follows. 1. During period of bad business, transmission of information is limited, which may increase uncertainty. 2. Future predictions by individuals are more demanding during recessions, because they do not occur often and economic agents are not accustomed to them. 3. Public policy tends to be more experimental over bad times, which can also cause higher uncertainty. 4. During recessions the implementation of new ideas and unused resources become cheaper which may lead to rise of uncertainty.