Economic Policy Uncertainty Spillovers in Booms and Busts

We estimate a nonlinear VAR to quantify the impact of economic policy uncertainty
shocks originating in the US on the Canadian unemployment rate in booms and busts.
We find strong evidence in favor of asymmetric spillover effects. Unemployment in
Canada is shown to react to uncertainty shocks in economic busts only. Such shocks
explain about 13% of the variance of the 2-year ahead forecast error of the Canadian
unemployment rate in periods of slack vs. just 2% during economic booms.
Counterfactual simulations lead to the identification of a novel "economic policy
uncertainty spillovers channel". According to this channel, jumps in US uncertainty foster
economic policy uncertainty in Canada in the first place and, because of the latter, lead
to a temporary increase in the Canadian unemployment rate. Evidence of asymmetric
spillover effects due to US EPU shocks are also found for the UK economy. This
evidence, which refers to a large economy having a low trade intensity with the US,
supports our view that a channel other than trade could be behind our empirical results.