You are uncertain and we are at stress! How does monetary policy uncertainty affect financial stress? The case of the US and G7

Abstract

The interconnectedness among global economies has led to the flourishing of trade, capital flows and technology. However, a growing literature in this area started monitoring the negative externalities associated with increasing levels of integration, focusing on the spillovers from the US economy. Using a pooled mean group estimator, we analyse the impact of monetary policy uncertainty (MPU) spillovers from the US on the financial stress of advanced economies. The results suggested that changes in the MPU of the US do affect the financial stress position of advanced economies. As a result of increased uncertainty, financial stress increases in the long run as the countries are based on similar fundamentals, and stress in one country could create a crisis-like condition in others. On the contrary, in the short-run, the advanced economies are in a temporarily better-off position as increased stress in the US opens up more capital inflow to these economies. The results are relevant to international macroeconomic policymakers and call for the need to keep domestic economies equipped under circumstances of unforeseen crisis. Timely policy interventions in advanced economies can help them in control sudden flow reversals, thereby protecting the domestic economy.