Abstract:
PURPOSE : We evaluate the comparative effectsof US monetary and fiscal policy uncertainty shockson real equity prices and real gross domestic productin developed and emerging economies.
DESIGN/METHODOLOGY/APPROACH : We employ the Global Vector Autoregressive (GVAR) model to trace the propagation effects of both U.S. monetary and fiscal policy uncertainty shocks on real equity prices and real gross domestic product. We utilize the GVAR database coveringboth the advanced and emerging countries (including the US) throughout 1985Q1 to 2019Q4 whose scope is governed by the availability of dataset for the equity market volatility-based monetary and fiscal policy uncertainty indices.
FINDINGS : We find that both the US fiscal and monetary policy uncertainty shocks have greater negative effects on the advanced markets thantheir emerging market counterparts. However, regardless of the market classification, we show that real equity prices respond more to monetary policy uncertainty than real gross domestic product while the reverse holds for fiscal policy uncertainty shock.
ORIGINALITY/VALUE : The current literature on parsedUSpolicy uncertainty shock with specific focus on real equity prices and real gross domestic product dwells on either monetary policy or fiscal policy uncertainty with a limited focus on country specificor few group of countries in a panel framework. We contribute to theliteratureby evaluating thecomparative effectsof both US monetary and fiscal policy uncertainty shocksthat account for theinternational transmission effect of the uncertainty shock within a GVAR framework.
PRACTICAL IMPLICATIONS : International investors need to understand the extent to which their returns can be undermined by US policy actions and potential diversification strategies based on the heterogeneous response of individual markets to the US uncertainty shocks.
