Does Economic Policy Uncertainty Lead Systemic Risk? A Comparative Analysis of Selected European Countries
- 21 Downloads
We study the relationship between economic policy uncertainty and systemic risk for nine European countries in January 2010–September 2016 by applying conventional Granger causality tests and advanced techniques (wavelet analysis and Bayesian VARs). The country-level analyses show that the lead-lag patterns vary considerably in the short and longer run as well as at different frequencies. Nonetheless, the pivotal role of uncertainty tends to strengthen over longer time horizons (at lower frequencies) and in the BVAR framework. This is true for financially fragile economies such as Ireland, Italy, Russia, Spain. A panel BVAR model confirms this finding for the whole sample.
KeywordsBayesian VAR Dynamic factor model Economic policy uncertainty Systemic risk Wavelet coherence
JEL ClassificationC32 C38 G32
The paper was presented at the Second World Congress of Comparative Economics, “Revolution and Evolution in Economic Development,” in St. Petersburg, Russia, June 15–17, 2017. Comments by two anonymous referees have been welcome. We are also grateful to Paul Wachtel for his support and patience.
- Aguiar-Conraria, L., and M.J. Soares. 2010. The Continuous Wavelet Transform: A Primer, NIPE working paper 23/2010.Google Scholar
- Amengual, D., and D. Xiu. 2013. Resolution of Policy Uncertainty and Sudden Declines in Volatility, Chicago booth research paper 13–78.Google Scholar
- Balcilar, M., R. Gupta, and M. Segnon. 2016. The Role of Economic Policy Uncertainty in Predicting US Recessions: A Mixed-frequency Markov-switching Vector Autoregressive Approach. Economics: The Open-Access Open-Assessment E-Journal 10(2016–27): 1–20.Google Scholar
- Benoit, S., J.-E. Colliard, C. Hurlin, and C. Pérignon. 2017. Where the Risks Lie: A Survey on Systemic Risk. Review of Finance 21(1): 109–152.Google Scholar
- Creal, D., and J.C. Wu. 2014. Monetary Policy Uncertainty and Macroeconomic Fluctuations. NBER working paper no 20594.Google Scholar
- Dicks, D.L., and P. Fulghieri. 2015. Uncertainty Aversion and Systemic Risk. CEPR discussion paper no 10510, Centre for Economic Policy Research, London.Google Scholar
- Dieppe, A.R., Legrand, B. and van Roye. 2016. The BEAR Toolbox. ECB working paper no 1934.Google Scholar
- Knight, F. 2006 . Risk, Uncertainty, and Profit. New York: Cosimo Classics.Google Scholar
- Manzo, G. 2014. What Drives Systemic Risk? Political Uncertainty and Contagion in Credit Markets—Three Essays in Empirical Finance. UniCredit & Universities Foundation working paper no 50.Google Scholar
- Pankoke, D. 2014. Sophisticated vs. Simple Systemic Risk Measures. University of St. Gallen working paper on finance no 2014/22.Google Scholar