Dynamic connectedness of economic policy uncertainty in G7 countries and the influence of the USA and UK on non-G7 countries

Abstract

We examine the median and tail connectedness of the economic policy uncertainties in G7 countries (Canada, France, Germany, Italy, Japan, the UK, and the USA) and several non-G7 countries (Australia, Brazil, Chile, Colombia, Greece, India, Ireland, Korea, Netherlands, Russia, Spain, SCMP China, Mainland China, Sweden, and Mexico) for the period of January 1997 to June 2023 using the quantile vector autoregressive framework which gives a more realistic measure of connectedness. Essentially, we assess the direction of shocks spillover transmissions among the country-groups and ascertain the role of the UK and US EPUs on the EPUs of the selected non-G7 countries. Among the G7 countries, and at the lower extreme, the role of the UK, the USA, France, and Germany as shock transmitters is observed, while at the upper market extreme, only France stood as a dominant net transmitter among the four members. At the middle quantile, the UK emerged as a strong net receiver, while the USA emerged as a strong net transmitter of shocks. In the non-G7 group, the dominant roles of the UK and the USA are also expressed, while Sweden, Australia, Chile, Korea, and Russia also play defensive roles as net transmitters in the network at the extreme and middle quantiles. Thus, relying solely on the median quantile, designed for other connectedness model variants in modelling the connectedness among G7 and selected non-G7 countries, could be misleading due to economic behaviours at different quantile values. Findings in this paper will guide policy makers in their preparedness towards future global economic crisis.