Uncertainty spill-overs: when policy and financial realms overlap

Bacchiocchi, Emanuele ; Dragomirescu-Gaina, Catalin (2022) Uncertainty spill-overs: when policy and financial realms overlap. Bologna: Dipartimento di Scienze economiche, p. 56. DOI 10.6092/unibo/amsacta/6983. In: Quaderni - Working Paper DSE (1174). ISSN 2282-6483.
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No matter its source, financial- or policy-related, uncertainty can feed onto itself, concealing its true origin and leading to identification challenges in empirical applications. We add to the existing stock of analytical methods able to disentangle among various types of uncertainty shocks, by generalising an identification approach based on magnitude restrictions to a multi-country setting. Within the Euro Area, we find evidence of sizable spill-overs arising from country-specific uncertainty shocks, with financial realm being a more important source than the policy realm. By leveraging on the flexibility of our identification strategy, we quantify the valuation ‘mistakes’ that arise from the inability to separate uncertainty shock types within a given country; we then show that the implicit under/over-valuations can be related to some simple cross-sectional indicators of financial and political stability, especially before the 2008/2009 crisis. A comparison between the responses of sovereign yields within and outside the Euro Area suggests strong within institutional arrangements and risk-sharing mechanisms that can blur the thin separation line between uncertainty shock types. In this context, we find that ECB reacted to those identified uncertainty shocks with the highest potential to spill over abroad, thus filling a leadership vacuum within the Euro Area.

Document type
Monograph (Working Paper)
Bacchiocchi, EmanueleUniversity of Bologna, Department of Economics0000-0002-7365-3630
Dragomirescu-Gaina, CatalinUniversità Cattolica del Sacro Cuore, Department of Economics and Finance0000-0001-7727-8391
policy uncertainty, financial integration, global VAR, unconventional monetary policy
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01 Aug 2022 12:34
Last modified
01 Aug 2022 12:34

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