The effects of economic policy uncertainty on European economies: evidence from a TVP-FAVAR

  • Jan Prüser
  • Alexander SchlösserEmail author


We use a time-varying parameter FAVAR model to investigate the effects of economic policy uncertainty (EPU) on a wide range of macroeconomic variables for eleven European Monetary Union (EMU) countries. First, we are able to distinguish between a group of fragile countries (GIIPS countries) and a group of stable countries (northern countries), where the former suffered the most due to EPU shocks. Second, we find that EPU shocks affect financial markets as well as the real economy and that private investors and financial market participants react more sensitively than consumers to EPU shocks. Third, we discover that the transmission of EPU shocks is quite stable over time.


TVP-FAVAR Economic policy uncertainty Fat data Hyperparameter European Monetary Union Hierarchical prior 

JEL Classification

C11 C32 E20 E60 


Compliance with ethical standards

Conflict of interest

Jan Prüser and Alexander Schlösser declare that they have no conflict of interest.

Human participants or animals performed

This article does not contain any studies with human participants or animals performed by any of the authors.

Supplementary material

181_2018_1619_MOESM1_ESM.pdf (584 kb)
Supplementary material 1 (pdf 583 KB)


  1. Aastveit K, Natvik G, Sola S (2017) Economic uncertainty and the influence of monetary policy. J Int Money Finance 76:50–67CrossRefGoogle Scholar
  2. Alam MR (2015) Economic policy uncertainty in the US: Does it matter for Canada? Econ Bull 35(4):2725–2732Google Scholar
  3. Alexopoulos M, Cohen J (2009) Uncertain times, uncertain measures. In: University of Toronto, working papers, 352Google Scholar
  4. Amir-Ahmadi P, Matthes C, Wang M-C (2018) Choosing prior hyperparameters: with applications to time-varying parameter models. J Bus Econ Stat.
  5. Bai J, Ng S (2002) Determining the number of factors in approximate factor models. Econometrics 70(1):191–221CrossRefGoogle Scholar
  6. Baker SR, Bloom N, Davis SJ (2012) Has economic policy uncertainty hampered the recovery? In: Chicago booth research paper, no, pp 12–06Google Scholar
  7. Baker SR, Bloom N, Davis SJ (2016) Measuring economic policy uncertainty. Q J Econ 131(4):1593–1636CrossRefGoogle Scholar
  8. Belke A, Osowski T (2018) International effects of euro area versus US policy uncertainty: a FAVAR approach. In: Economic inquiryGoogle Scholar
  9. Benati L (2014) Economic policy uncertainty, the great recession, and the great depression. University of Bern, MimeoGoogle Scholar
  10. Benito A (2006) Does job insecurity affect household consumption? Oxford Econ Pap 58(1):157–181CrossRefGoogle Scholar
  11. Bernanke BS (1983) Irreversibility, uncertainty and cyclical investment. Q J Econ 98(1):85–106CrossRefGoogle Scholar
  12. Bernanke BS, Boivin J, Eliasz P (2005) Measuring the effects of monetary policy: a factor-augmented vector autoregressive (FAVAR) approach. Q J Econ 120(1):387–422Google Scholar
  13. Bloom N (2009) The impact of uncertainty shocks. Econometrica 77(3):623–685CrossRefGoogle Scholar
  14. Bloom N, Bond S, Van Reenen J (2007) Uncertainty and investment dynamics. Rev Econ Stud 74(2):391–415CrossRefGoogle Scholar
  15. Bordo MD, Duca JV, Koch C (2016) Economic policy uncertainty and the credit channel: aggregate and bank level U.S. evidence over several decades. J Financ Stab 26:90–106CrossRefGoogle Scholar
  16. Boumparis P, Milas C, Panagiotidis T (2017) Economic policy uncertainty and sovereign credit rating decisions: panel quantile evidence for the eurozone. J Int Money Finance 79:39–71CrossRefGoogle Scholar
  17. Caggiano G, Castelnuovo E, Groshenny N (2014) Uncertainty shocks and unemployment dynamics in US recessions. J Monet Econ 67:78–92CrossRefGoogle Scholar
  18. Caldara D, Fuentes-Albero C, Gilchrist S, Zakrajsek E (2016) The macroeconomic impact of financial and uncertainty shocks. Eur Econ Rev 88:185–207CrossRefGoogle Scholar
  19. Carrière-Swallow Y, Céspedes LF (2013) The impact of uncertainty shocks in emerging economies. J Int Econ 90(2):316–325CrossRefGoogle Scholar
  20. Chang T, Chen WY, Gupta R, Nguyen DK (2015) Are stock prices related to the political uncertainty index in OECD countries? Evidence from the bootstrap panel causality test. Econ Syst 39(2):288–300CrossRefGoogle Scholar
  21. Chen J, Jiang F, Tong G (2016) Economic policy uncertainty in China and stock market expected returns. Account Finance 57(5):1265–1286. CrossRefGoogle Scholar
  22. Colombo V (2013) Economic policy uncertainty in the US: Does it matter for the Euro area? Econ Lett 121(1):39–42CrossRefGoogle Scholar
  23. Donadelli M (2015) Google search-based metrics, policy-related uncertainty and macroeconomic conditions. Appl Econ Lett 22(10):801–807CrossRefGoogle Scholar
  24. ECB (2016) The impact of uncertainty on activity in the Euro area. Accessed 1 Feb 2017
  25. Ellis C, Mumtaz H, Zabcyk P (2014) What lies beneath? A time-varying FAVAR model for the UK transmission mechanism. Econ J 124(576):668–699CrossRefGoogle Scholar
  26. Fry R, Pagan A (2011) Sign restrictions in structural vector autoregressions: a critical review. J Econ Lit 49(4):938–60CrossRefGoogle Scholar
  27. Gambetti L, Musso A (2016) Loan supply shocks and the business cycle. J Appl Econom 32:764–782CrossRefGoogle Scholar
  28. Gilchrist S, Sim J, Zakrajšek E (2014) Uncertainty, financial frictions, and irreversible investment. In: NBER working papers, 20038Google Scholar
  29. International Monetary Fund (2012) World economic outlook: coping with high debt and sluggish growthGoogle Scholar
  30. Jurado K, Ludvigson S, Ng S (2015) Measuring uncertainty. Am Econ Rev 105(3):1177–1216CrossRefGoogle Scholar
  31. Korobilis D (2013) Assessing the transmission of monetary policy using time-varying parameter dynamic factor models. Oxford Bull Econ Stat 75(2):157–179CrossRefGoogle Scholar
  32. Lippi M, Reichlin L (1994) Var anlysis, nonfundamental representations, blaschke matrices. J Econom 1:307–325CrossRefGoogle Scholar
  33. Meinen P, Röhe O (2017) On measuring Uncertainty and its impact on investment: cross-country evidence from the Euro area. Eur Econ Rev 92:161–179CrossRefGoogle Scholar
  34. Netšunajev A, Glass K (2017) Uncertainty and employment dynamics in the Euro area and the US. J Macroecon 51:48–62CrossRefGoogle Scholar
  35. Nodari G (2014) Financial regulation policy uncertainty and credit spreads in the US. J Macroecon 41:122–132CrossRefGoogle Scholar
  36. Österholm P, Stockhammar P (2014) The euro crisis and Swedish GDP growth—a study of spillovers. Appl Econ Lett 21(16):1105–1110CrossRefGoogle Scholar
  37. Popp A, Zhang F (2016) The macroeconomic effects of uncertainty shocks: the role of the financial channel. J Econ Dyn Control 69:319–349CrossRefGoogle Scholar
  38. Primiceri GE (2005) Time varying structural vector autoregressions. Rev Econ Stud 72(3):821–852CrossRefGoogle Scholar
  39. Prüser J, Schlösser A (2018) On the time-varying effects of economic policy uncertainty on the US economy (No. 761). Ruhr economic papers.
  40. Ramirez J, Zha JDW (2010) Structural vector autoregressions: theory of identification and algorithms for inference. Rev Econ Stud 77(2):665–696CrossRefGoogle Scholar
  41. Romer CD (1990) The great crash and the onset of the great depression. Q J Econ 105(3):597–624CrossRefGoogle Scholar
  42. Scheffel EM (2015) Accounting for political uncertainty factor. J Appl Econom 31:1048–1064CrossRefGoogle Scholar
  43. Sims C (1980) Macroeconomics and reality. Econometrica 48(1):1–48CrossRefGoogle Scholar
  44. Sims CA, Zha T (2006) Where there regime switches in US monetary policy? Am Econ Rev 96(1):54–81CrossRefGoogle Scholar
  45. Stock JH, Watson M (1998) Diffusion indexes. In: NBER working papers, 6702Google Scholar
  46. Stock JH, Watson MW (2005) Implications of dynamic factor models for VAR analysis. In: NBER working papers, 11467Google Scholar
  47. Waisman M, Ye P, Zhu Y (2015) The effect of political uncertainty on the cost of corporate debt. J Financ Stab 16:106–117CrossRefGoogle Scholar

Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Faculty of Economics and Business AdministrationUniversity of Duisburg-EssenEssenGermany
  2. 2.Ruhr Graduate School in EconomicsRWI - Leibniz Institute for Economic ResearchEssenGermany

Personalised recommendations