Estimating uncertainty spillover effects across euro area using a regime dependent VAR model

Abstract This paper investigates macroeconomic uncertainty spillover effects across countries and their impact on real economic activity in different economic periods, i.e. pre-crisis and during the recent financial crisis. The analysis is initially carried out using Monte Carlo simulations and, subsequently, real data for four euro zone economies, namely Italy, France, Germany, and Spain. The Monte Carlo findings clearly indicate a need to account for spillover effects across countries when investigating the impact of aggregate uncertainty on economic variables. The empirical results provide clear-cut evidence of the existence of macroeconomic spillovers between the four euro countries, with some feedback from periphery economies, notably Italy, to the core economies during the financial crisis period. Further, the impact of uncertainty on real economic activity is dampened for the four euro countries when spillover effects are accounted for. Spillover effects among the four countries are also observed when US uncertainty is taken into account. Further, US macroeconomic uncertainty impacts negatively on the real economic activity of the four euro countries.