Juan Manuel Figueres (University of Padua) on "Economic Policy Uncertainty Spillovers in Booms and Busts" (with G. Caggiano and E. Castelnuovo)

We estimate a nonlinear VAR to quantify the impact of economic policy uncertainty shocks originating in the US on the Canadian unemployment rate in booms and busts. We find strong evidence in favor of asymmetric spillover effect. Unemployment in Canada is shown to react to uncertainty shocks in economic busts only. Such shocks explain about 13% of the variance of the 2-year ahead forecast error of the Canadian unemployment rate in periods of slack vs. just  2%  during  economic  booms.  Counterfactual  simulations  lead  to  the identification  of  a  novel “economic policy uncertainty spillovers channel”. According to this channel, jumps in US uncertainty  foster  economic  policy  uncertainty  in  Canada  in  first  place  and,  because  of  the  latter,  lead  to  a  temporary  increase  in  the  Canadian  unemployment  rate.  Evidence  of  asymmetric spillover effects due to US EPU shocks are also found for the UK economy. This evidence, which refers to a large economy having a low trade intensity with the US, supports our view that a channel other than trade could be behind our empirical results.