Connectedness of Economic Policy Uncertainty between the G-7 Countries

Purpose: Baker et al. (2013) introduce an index to quantify economic policy uncertainty (EPU) based on current media reports. The extant literature shows that this EPU index can predict future economic activities of individual countries. This study examines how the connectedness between the EPUs of G-7 countries has changed over time. Design/Methodology/Approach: Monthly EPU data for the G-7 countries have been collected for the period January 1998 through October 2023. Lasso-VAR (Vector Auto regression) is used to capture the dynamic connectedness of EPUs. This technique allows for feasible estimation where the number of regression parameters is close to or exceeds the sample size. Findings: Results show that the US, Germany, and France are the most prominent transmitters of economic uncertainty, and the UK, Japan, Canada, and Italy are generally recipients of such uncertainty. This finding confirms the dominance of the first group of countries. Implications/Originality/Value: Investors in recipient countries should be cautious about the economic uncertainties originating in other G-7 countries. Since emerging markets are slow to react to new information, such information – even of monthly frequency – may have strong impact on these markets. Thus, future studies should shed light on the nature of the connectedness of economic policy uncertainty among emerging stock markets.