Ruhr Economic Papers

UDE, 12/2018, 25 S./p., 8 Euro, ISBN 978-3-86788-910-0 DOI: 10.4419/86788910

Abstract

Using generalised variance decompositions from vector autoregressions, we analyse
cross-country, cross-category spillovers of economic policy uncertainty (EPU) and
financial market volatility between the US and Japan. Our model includes indices of
monetary, fiscal and trade policy uncertainty for each country, as well as three measures
of option-implied stock market and exchange rate volatility, respectively. We find that
the financial market volatility indices are usually substantial net spillover transmitters
towards the total group of EPU measures. However, the Japanese equity and especially
the FX volatility index are typically more affected by EPU spillovers than the US VXO. Our
results also reveal that, compared to within-country spillovers, cross-country spillovers
of EPU are relatively small and less volatile. Finally, we show that the direction of net
EPU spillovers between the US and Japan is both time- and category-dependent with
different EPU categories acting as strong sources of uncertainty spillovers throughout
the sample period.