In the MA representation, the generalized forecast error variance decomposition (GFEVD) at the H-step-ahead forecast horizon can be used to calculate the total, directional and pairwise spillovers of Diebold and Yilmaz (2009, 2012, 2015). Compared to related measures constructed by Baker, Bloom, and Davis (2015) that are global in nature, our U.S. MPU measure is U.S. centric and focuses on uncertainty related to Fed monetary policy. Q Rev Econ Financ 2019:5, Diebold FX, Yilmaz K (2009) Measuring financial asset return and volatility spillovers, with application to global equity markets. We employ the IRU for all 9 countries (US, Germany, France, Italy, Spain, UK, Japan, Canada, and Sweden, denoted in this study, by U, G, F, I, S, UK, J, C, and Sw, respectively) and we analyze all of them. Our ndings have practical implications for the conduct of monetary policy. uncertainty about this path. 2018). Conditional on a monetary policy shock, higher uncertainty about monetary policy tends to make securities with longer maturities relatively more attractive to investors. The off-diagonal elements of the variance decomposition matrix \(\vartheta (H)\) give the pairwise spillovers across variables. The pairwise spillovers in the US show that, after the crisis, there are instances where this factor is a negative net transmitter (i.e., a net receiver) of uncertainty. All Rights Reserved. When decomposing the VIX into two components, a proxy for risk aversion and expected stock market volatility ("uncertainty"), we find that a lax monetary policy decreases both risk aversion and uncertainty, with the former effect being stronger. Econ Lett 121(1):39–42, Çekin SE, Pradhan AK, Tiwari AK, Gupta R (2019) Measuring co-dependencies of economic policy uncertainty in Latin American Countries using vine copulas. The US transmits the largest spillover, but Spain’s spillovers have a larger mean, with a smaller variance. This finding is consistent with the results found by Diebold and Yilmaz (2015). All the authors have equally contributed to designing the study, studying concepts or design, dealing with data collection, and calculation so as to write the manuscript. Monetary Policy and Uncertainty Paul Jenkins, Deputy Governor and David Longworth, Adviser • In formulating monetary policy, central banks must cope with substantial economic uncertainty. Policymakers should look at incorporating US, Germany, France and Spain’s MPU in decisions, as they were consistent net transmitters of uncertainty. Atténuation des effets et choix délicats : premiers enseignements tirés de la situation en Chine We suspect that the spillovers that they receive from other countries would be larger than those in our analysis (compared to own spillovers) due to their greater reliance on foreign currency denoted debt. J Financ Econ 16(2):271–296, Biljanovska N, Grigoli F, Hengge M (2017) Fear thy neighbor: spillovers from economic policy uncertainty. Figures 1, 2, 3, 4, 5, 6, 7 and 8 present the time-varying behavior of net pairwise spillovers from May 2007, while Figs. 9, 10, 11, 12, 13, 14, 15 and 16 present the same for the 10y3m and 10y12m datasets from May 2003. A, B and C correspond to the different panels in the BK tables in Appendix, where A is the short term (1–4 months), B is the medium term (4–12 months) and C the long term (12+ months), respectively. The index consists of two bond maturity levels, 3 months and 10 years, at both 3- and 12-month ahead forecast horizons. One similar study by Nsafoah et al. The data favors a model with two unspanned volatility factors that capture uncertainty about monetary policy and the term premium. Two dimensions of uncertainty react in opposite directions to a shock to the real economy, and the response of inflation to uncertainty shocks vary across different historical episodes. We show that, under a variety of VAR identification schemes, positive shocks to uncertainty about monetary policy robustly raise credit spreads and reduce output. Q J Econ 131(4):1593–1636, Balcilar M, Demirer R, Gupta R, Van Eyden R (2017a) The impact of US policy uncertainty on the monetary effectiveness in the Euro area., DOI: The effects of monetary policy on uncertainty are similar but somewhat weaker. NBER Working Paper Series, No. 21162, Rey H (2016) International channels of transmission of monetary policy and the Mundellian trilemma. Doctoral dissertation, Yin L, Han L (2014) Spillovers of macroeconomic uncertainty among major economies. As uncertainty spillovers vary with time, their response cannot be the same every time. We propose a new term structure model where the second moments of macroeconomic variables and yields can have a first-order effect on their dynamics. A seemingly unrelated event in one country or sector can be transmitted to a different country or sector, where the effects of these shocks are persistent and can be reinforced by other shocks. The COVID-19 pandemic is influencing the management of monetary policy in its role as regulator of aggregate demand and guarantor of macroeconomic stability. The residual from this regression, η t, is the monetary policy uncertainty surprise. To view a copy of this licence, visit When investigating spillovers, the literature seems fond of the connectedness measure developed by Diebold and Yilmaz (2009, 2012, 2015). California Privacy Statement, 2017; Antonakakis et al. which captures the relative contributions to the total forecast error variance from spillovers of volatility shocks across variables. Front Finan Econ 11(1):73–102, Antonakakis N, Gabauer D, Gupta R (2018) Greek Economic Policy Uncertainty: Does it Matter for the European Union? The data favors a model with two unspanned volatility factors that capture uncertainty about monetary policy and the term premium. But it is impossible to have such a model, and that makes the work of macroeconomists—and central bank policy-makers— Econ Lett 143:24–27, Istrefi K, Mouabbi S (2018) Subjective interest rate uncertainty and the macroeconomy: a cross-country analysis. A particular difficulty has been the need to operationalise the concept in order to yield definitive policy recommendations. The difference in start dates is due to the different time periods for the different datasets. The suspense around FOMC announcements. The total connectedness increases as the frequency increases in the BK, with the long term being more connected. They applied a TVP-VAR to a dataset they compiled using the EPU and Arbatli et al. Here, the own spillover index for the US is much higher than in the previous two periods, where \(34.33\%\) of uncertainty spillovers received is from its own innovations. The increase in bond maturity and forecast horizon leads to reduced uncertainty spillovers. The second component is estimated using a stochastic volatility model, which results in a subjective interest rate uncertainty measure that allows for shocks to be time-varying and stochastic. NBER Working Paper Series, No. Part of We find that most of the volatility is confined to the crisis period. The developing world may have a greater reliance on foreign denoted debt, and the spillovers to these countries would be larger than spillovers to developed countries. We extend our approach to other countries, finding elevated levels of economic policy uncertainty abroad, as well. 201840, Antonakakis N, Gabauer D, Gupta R (2019) International monetary policy spillovers: evidence from a time-varying parameter vector autoregression. We use the recently created monthly Interest Rate Uncertainty measure, to investigate monetary policy uncertainty across the US, Germany, France, Italy, Spain, UK, Japan, Canada, and Sweden in both the time and frequency domains. et al. The elements in the last row (labeled “TO”) represent directional spillovers transmitted by country i (column) to all other countries, and those in the last column (labeled “FROM”) are directional spillovers received by country j (row) from all other countries. (2017b) found that monetary policy uncertainty suppresses inflation and output simultaneously, which leads to lower interest rates. Our results show that the increase in bond maturity and forecast horizon leads to reduced uncertainty spillovers. The methodology uses generalized forecast error variance decomposition to identify bi-directional spillovers, where the GARCH-in-mean VAR used by Nsafoah et al. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. All authors read and approved the final manuscript. For example, the Federal Open Market Committee (2009) and the International Monetary Fund (IMF) (2012, 2013) suggest that uncertainty about U.S. and European fiscal, regulatory, and monetary policies contributed to a steep economic decline in 2008–2009 and slow recoveries afterward.1 To investigate the role of policy uncertainty we first develo… Struct Change Econ Dyn 52:167–173, Gupta R, Ma J, Risse M, Wohar ME (2018) Common business cycles and volatilities in US states and MSAs: the role of economic uncertainty. J Int Money Financ 88:296–313, Klößner S, Sekkel R (2014) International spillovers of policy uncertainty. Economic Structures 9, 41 (2020). We find that, since 2008, economic policy uncertainty in the United States has been at a level approximately two times its long run average. Istrefi, K., & Mouabbi, S. Subjective interest rate uncertainty and the macroeconomy: A cross-country analysis (2018). Q Rev Econ Financ 70:194–202, Tran TD (2019) Measuring the macroeconomic impact of uncertainty. (2017b) found that MPU suppresses inflation and output simultaneously, which leads to lower interest rates. In contrast, the diagonal elements of \(\vartheta (H)\) measure the contributions of shocks to variable i to its own forecast error variance. 2016) and Interest Rate Uncertainty, indicating that it can capture uncertainty surrounding monetary policy. \end{aligned}$$, $$\begin{aligned} {{\widetilde{C}}}^d=C^d\cdot \Gamma \left( d\right) \end{aligned}$$, \(\Gamma \left( d\right) = \frac{\sum _{i,j=1}^{k}{({{\widetilde{\vartheta }}}_d)}_{i,j}}{\Sigma _{i,j}{(\vartheta )}_{i,j}} =\frac{\sum _{i,j=1}^{k}{({\widetilde{\vartheta }}_d)}_{i,j}}{k}\),,, Therefore, in the long run, a country’s uncertainty is mainly influenced by its own uncertainty. Oxford University Press, New York, Gabauer D, Gupta R (2018) On the transmission mechanism of country-specific and international economic uncertainty spillovers: evidence from a TVP-VAR connectedness decomposition approach. The uncertainty effect of COVID-19 hits … In the presence Balcilar et al. This is due to the dollar being widely used as a funding currency. The spillovers between the European countries are small in the short and medium terms but large in the long term, in the 3-month bond yields at a 3-month forecast horizon dataset. Econ Lett 156:179–183, Baruník J, Křehlík T (2018) Measuring the frequency dynamics of financial connectedness and systemic risk. Drew D. Creal & Jing Cynthia Wu, 2017. Two estimation procedures were used at this point. We also find that the US is a net transmitter of uncertainty for most of the samples, but there are some instances where it is a net receiver.