Empirica

pp 1–16 | Cite as

The impact of US uncertainty on the Euro area in good and bad times: evidence from a quantile structural vector autoregressive model

  • Rangan Gupta
  • Chi Keung Marco Lau
  • Mark E. Wohar
Original Paper

Abstract

We estimate a quantile structural vector autoregressive model for the Euro area to assess the real effects of uncertainty shocks in expansions and recessions using monthly data covering the period of 1999:02–2016:05. Domestic and foreign (US) uncertainty shocks hitting during recessions are found to produce a relatively overall stronger negative impact on output growth than in expansions, with US shocks having more pronounced effects. Inflation, in general, is unaffected from a statistical perspective. Our results tend to suggest that policymakers need to implement state-dependent policies, with stimulus policies being more aggressive during recessions—something we see from our results in terms of stronger declines in the interest rate during bad times.

Keywords

Economic policy uncertainty US-Euro area spillovers Quantile structural vector autoregressive model 

JEL Classification

C32 E32 E60 

Notes

Acknowledgements

We would like to thank an anonymous referee for many helpful comments. However, any remaining errors are solely ours.

References

  1. Aastveit KA, Natvik GJ, Sola S (2017) Macroeconomic uncertainty and the effectiveness of monetary policy. J Int Money Finance 76:50–67CrossRefGoogle Scholar
  2. Abadir K, Caggiano G, Talmain G (2013) Nelson–Plosser revisited: the ACF approach. J Econom 175:22–34CrossRefGoogle Scholar
  3. Alessandri P, Mumtaz H (2014) Financial regimes and uncertainty shocks. School of Economics and Finance, Queen Mary University of London Working Paper No. 729Google Scholar
  4. Alexopoulos M, Cohen J (2009) Uncertain times, uncertain measures. University of Toronto, Department of Economics Working Paper No. 325Google Scholar
  5. Azzimonti M (2015) Partisan conflict and private investment. NBER Working Paper No. w21273Google Scholar
  6. Bachmann R, Bayer C (2011) Uncertainty business cycles-really? National Bureau of Economic Research Working Paper No. w16862Google Scholar
  7. Bachmann R, Elstner S, Sims E (2013) Uncertainty and economic activity: evidence from business survey data. Am Econ J Macroecon 5:217–249CrossRefGoogle Scholar
  8. Baker S, Bloom N, Davis S (2016) Measuring economic policy uncertainty. Q J Econ.  https://doi.org/10.1093/qje/qjw024 Google Scholar
  9. Balcilar M, Gupta R, Jooste C (2016a) Long memory, economic policy uncertainty and forecasting US inflation: a Bayesian VARFIMA approach. Appl Econ.  https://doi.org/10.1080/00036846.2016.1210777 Google Scholar
  10. Balcilar M, Gupta R, Segnon M (2016b) The role of economic policy uncertainty in predicting U.S. recessions: a mixed-frequency markov-switching vector autoregressive approach. Economics 10(27):1–20Google Scholar
  11. Balcilar M, Demirer R, Gupta R, van Eyden R (2017) Effectiveness of monetary policy in the Euro area: the role of US economic policy uncertainty. J Policy Model 39(6):1052–1064CrossRefGoogle Scholar
  12. Bali TG, Brown SJ, Tang Y (2015) Macroeconomic uncertainty and expected stock returns. Georgetown McDonough School of Business Research Paper No. 2407279Google Scholar
  13. Basu S, Bundick B (2014) Uncertainty shocks in a model of effective demand. Federal Reserve Bank of Kansas City Research Working Paper No. 14-15Google Scholar
  14. Benati L (2013) Economic policy uncertainty and the great recession. University of Bern, MimeoGoogle Scholar
  15. Bernanke BS (1983) Irreversibility, uncertainty, and cyclical investment. Q J Econ 98:85–106CrossRefGoogle Scholar
  16. Blanchard O (2009) (Nearly) nothing to fear but fear itself. The economist, economics focus (guest article), January 29Google Scholar
  17. Bloom N (2009) The impact of uncertainty shocks. Econometrica 77(3):623–685CrossRefGoogle Scholar
  18. Bloom N, Floetotto M, Jaimovich N, Saporta-Eksten I, Terry SJ (2014) Really uncertain business cycles. Stanford University, MimeoGoogle Scholar
  19. Born B, Pfeifer J (2014) Policy risk and the business cycle. J Monet Econ 68:68–85CrossRefGoogle Scholar
  20. Brogaard J, Detzel A (2015) The asset-pricing implications of government economic policy uncertainty. Manag Sci 61:3–18CrossRefGoogle Scholar
  21. Caggiano G, Castelnuovo E (2011) On the dynamics of international inflation. Econ Lett 112(2):189–191CrossRefGoogle Scholar
  22. Caggiano G, Castelnuovo E, Groshenny N (2014a) Uncertainty shocks and unemployment dynamics in US recessions. J Monet Econ 67:78–92CrossRefGoogle Scholar
  23. Caggiano G, Castelnuovo E, Nodari G (2014b) Uncertainty and monetary policy in good and bad times. Dipartimento di Scienze Economiche “Marco Fanno”, Working Paper No. 0188Google Scholar
  24. Caggiano G, Castelnuovo E, Figueres JM (2016) Economic policy uncertainty spillovers in booms and busts. University of Padova and University of Melbourne, MimeoGoogle Scholar
  25. Caldara D, Iacoviello M (2016) Measuring geopolitical risk. Working Paper, Board of Governors of the Federal Reserve BoardGoogle Scholar
  26. 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
  27. Carriero A, Mumtaz H, Theophilopoulou A, Theodoridis K (2015) The impact of uncertainty shocks under measurement error: a proxy SVAR approach. J Money Credit Bank 47(6):1223–1238CrossRefGoogle Scholar
  28. Castelnuovo E, Caggiano G, Pellegrino G (2015) Estimating the real effects of uncertainty shocks at the zero lower bound. Dipartimento di Scienze Economiche “Marco Fanno”, Working Paper No. 0200Google Scholar
  29. Cecchetti S, Li H (2008) Measuring the impact of asset price booms using quantile vector autoregressions. Brandeis University, Department of Economics, MimeoGoogle Scholar
  30. Cheng C-HJ, Hankins WA, Chiu C-WJ (2016) Does US partisan conflict matter for the Euro area? Econ Lett 138:64–67CrossRefGoogle Scholar
  31. Christiano L, Motto R, Rostagno M (2014) Risk shocks. Am Econ Rev 104(1):27–65CrossRefGoogle Scholar
  32. Chuliá H, Gupta R, Uribe JM, Wohar ME (2017) Impact of US uncertainties on emerging and mature markets: evidence from a quantile-vector autoregressive approach. J Int Financ Mark Inst Money 48:178–191CrossRefGoogle Scholar
  33. Colombo V (2013) Economic policy uncertainty in the US: does it matter for the Euro area? Econ Lett 121:39–42CrossRefGoogle Scholar
  34. Creal DD, Wu C (2017) Monetary policy uncertainty and economic fluctuations. Int Econ Rev 58(4):1317–1354CrossRefGoogle Scholar
  35. Dixit AK, Pindyck RS (1994) Investment under uncertainty. Princeton University Press, PrincetonGoogle Scholar
  36. Fernández-Villaverde J, Guerrón-Quintana P, Rubio-Ramírez JF, Uribe M (2011) Risk matters: the real effects of volatility shocks. Am Econ Rev 101:2530–2561CrossRefGoogle Scholar
  37. Fernández-Villaverde J, Guerrón-Quintana P, Kuester K, Rubio-Ramírez JF (2015) Fiscal volatility shocks and economic activity. Am Econ Rev 105(11):3352–3384CrossRefGoogle Scholar
  38. Foerster A (2014) The asymmetric effects of uncertainty on employment. Fed Reserve Bank Kans City Econ Rev Quart 3:5–26Google Scholar
  39. Furlanetto F, Ravazzolo F, Sarferaz S (2014) Identification of financial factors in economic fluctuations. Norges Bank Working Paper No. 09/2014Google Scholar
  40. Gilchrist S, Sim JW, Zakrajek E (2013) Uncertainty, financial frictions, and irreversible investment. Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, Finance and Economics Discussion Series, Paper No. 2014-69Google Scholar
  41. Gourio F (2012) Disaster risk and business cycles. Am Econ Rev 102(6):2734–2766CrossRefGoogle Scholar
  42. Gupta R, Jooste C (2017) Unconventional monetary policy shocks in OECD countries: how important is the extent of policy uncertainty? Int Econ Econ Policy.  https://doi.org/10.1007/s10368-017-0380-8 Google Scholar
  43. Gupta R, Pierdzioch C, Risse M (2016) On international uncertainty links: BART-based empirical evidence for Canada. Econ Lett 143:24–27CrossRefGoogle Scholar
  44. Istrefi K, Piloiu A (2015) Economic policy uncertainty and inflation expectations. Banque de France, MimeoGoogle Scholar
  45. Johannsen BK (2013) When are the effects of fiscal policy uncertainty large. Northwestern University, MimeoGoogle Scholar
  46. Jones PM, Enders W (2016) The asymmetric effects of uncertainty on macroeconomic activity. Macroecon Dyn 20(5):1219–1246CrossRefGoogle Scholar
  47. Jones PM, Olson E (2013) The time-varying correlation between uncertainty, output and inflation: evidence from a DCC-GARCH model. Econ Lett 118:33–37CrossRefGoogle Scholar
  48. Jones PM, Olson E (2015) The international effects of US uncertainty. Int J Finance Econ 20:242–252CrossRefGoogle Scholar
  49. Jurado K, Ludvigson SC, Ng S (2015) Measuring Uncertainty. Am Econ Rev 105(3):1177–1216CrossRefGoogle Scholar
  50. Kang W, Lee K, Ratti RA (2014) Economic policy uncertainty and firm-level investment. J Macroecon 39:42–53CrossRefGoogle Scholar
  51. Karnizova L, Li JC (2014) Economic policy uncertainty, financial markets and probability of US recessions. Econ Lett 125:261–265CrossRefGoogle Scholar
  52. Kilian L, Park C (2009) The impact of oil price shocks on the US stock market. Int Econ Rev 50:1267–1287CrossRefGoogle Scholar
  53. Knotek ES II, Khan S (2011) How do households respond to uncertainty shocks. Fed Reserve Bank Kans City Econ Rev 96:5–34Google Scholar
  54. Koenker RW, d’Orey V (1987) Algorithm AS 229: computing regression quantiles. J R Stat Soc Ser C (Appl Stat) 36(3):383–393Google Scholar
  55. Krippner L (2012) Modifying Gaussian term structure models when interest rates are near the zero lower bound. Reserve Bank of New Zealand Discussion Paper 2012/02Google Scholar
  56. Krippner L (2013) A tractable framework for zero lower bound gaussian term structure models. Australian National University CAMA Working Paper 49/2013Google Scholar
  57. Leduc S, Liu Z (2013) Uncertainty shocks are aggregate demand shocks. Federal Reserve Bank of San Francisco, Working Paper 2012-10Google Scholar
  58. Linnemann L, Winkler R (2016) Estimating nonlinear effects of fiscal policy using quantile regression methods. Oxf Econ Pap.  https://doi.org/10.1093/oep/gpw020 Google Scholar
  59. Ludvigson SC, Ma S, Ng S (2015) Uncertainty and business cycles: exogenous impulse or endogenous response? National Bureau of Economic Research, Working Paper No. w21803Google Scholar
  60. Manela A, Moreira A (2017) News implied volatility and disaster concerns. J Financ Econ 123(1):137–162CrossRefGoogle Scholar
  61. Mecikovsky AM, Meier M (2015) Do plants freeze upon uncertainty shocks?. University of Bonn, MimeoGoogle Scholar
  62. Morley J, Piger J (2012) The asymmetric business cycle. Rev Econ Stat 94(1):208–221CrossRefGoogle Scholar
  63. Morley J, Piger J, Tien P-L (2013) Reproducing business cycle features: are nonlinear dynamics a proxy for multivariate information? Stud Nonlinear Dyn Econ 17(5):483–498Google Scholar
  64. Mumtaz H, Surico P (2013) Policy uncertainty and aggregate fluctuations. Queen Mary University of London, School of Economics and Finance, Working Paper No. 708Google Scholar
  65. Mumtaz H, Theodoridis K (2015) Common and country specific economic uncertainty. Queen Mary University of London, School of Economics and Finance, Working Paper No. 752Google Scholar
  66. Mumtaz H, Theodoridis K (2016) The changing transmission of uncertainty shocks in the us: an empirical analysis. J Bus Econ Stat.  https://doi.org/10.1080/07350015.2016.1147357 Google Scholar
  67. Mumtaz H, Zanetti F (2013) The impact of the volatility of monetary policy shocks. J Money Credit Bank 45:535–558CrossRefGoogle Scholar
  68. Mumtaz H, Sunder-Plassmann L, Theophilopoulou A (2016) The state level impact of uncertainty shocks. Queen Mary University of London, School of Economics and Finance, Working Paper No. 793Google Scholar
  69. Nakata T (2013) Uncertainty at the zero lower bound. Federal Reserve Board, Finance and Economics Discussion Series Working Paper No. 2013-09Google Scholar
  70. Nodari G (2014) Financial regulation policy uncertainty and credit spreads in the U.S. J Macroeconomics 41:122–132CrossRefGoogle Scholar
  71. Orlik A, Veldkamp L (2014) Understanding uncertainty shocks and the role of black swans. NBER Working Paper No. 20445Google Scholar
  72. Pellegrino G (2018) Uncertainty and the real effects of monetary policy shocks in the Euro area. Econ Lett 162:177–181CrossRefGoogle Scholar
  73. Rossi B, Sekhposyan T (2015) Macroeconomic uncertainty indices based on nowcast and forecast error distributions. Am Econ Rev Pap Proc 105(5):650–655CrossRefGoogle Scholar
  74. Rossi B, Sekhposyan T, Soupre M (2016) Understanding the sources of macroeconomic uncertainty. Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI), MimeoGoogle Scholar
  75. Schüler YS (2014) Asymmetric effects of uncertainty over the business cycle: a quantile structural vector autoregressive approach. University of Konstanz, Department of Economics, Working Paper Series No. 2014-02Google Scholar
  76. Scotti C (2016) Surprise and uncertainty indexes: real-time aggregation of real-activity macro surprises. J Monet Econ 82:1–19CrossRefGoogle Scholar
  77. Segnon M, Gupta R, Bekiros S, Wohar ME (2016) Forecasting US GNP growth: the role of uncertainty. University of Pretoria, Department of Economics, Working Paper No. 201667Google Scholar
  78. Shin M, Zhong M (2016) A new approach to identifying the real effects of uncertainty shocks. Finance and Economics Discussion Series 2016-040. Washington: Board of Governors of the Federal Reserve SystemGoogle Scholar
  79. Sin CYC (2015) The economic fundamental and economic policy uncertainty of Mainland China and their impacts on Taiwan and Hong Kong. Int Rev Econ Finance 40(C):298–311CrossRefGoogle Scholar
  80. Stock JH, Watson MW (2012) Disentangling the channels of the 2007–2009 recession. Brookings Papers on Economic Activity, Spring, 81–135Google Scholar
  81. Stockhammar P, Österholm P (2016) Effects of US policy uncertainty on Swedish GDP growth. Empir Econ 50(2):443–462CrossRefGoogle Scholar
  82. Strobel J (2015) On the different approaches of measuring uncertainty shocks. Econ Lett 134:69–72CrossRefGoogle Scholar
  83. Wu JC, Xia FD (2016) Measuring the macroeconomic impact of monetary policy at the zero lower bound. J Money Credit Bank 48(2–3):253–291CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of PretoriaPretoriaSouth Africa
  2. 2.Department of Accountancy, Finance and Economics, Huddersfield Business SchoolUniversity of HuddersfieldHuddersfieldUK
  3. 3.College of Business AdministrationUniversity of Nebraska at OmahaOmahaUSA
  4. 4.School of Business and EconomicsLoughborough UniversityLeicestershireUK

Personalised recommendations