The Financial US Uncertainty Spillover Multiplier: Evidence from a GVAR Model

This study examines the role of the Global Financial Cycle (GFCy) in the propagation of uncertainty shocks from the U.S. to global economies. Specifically, we construct a large-scale global vector autoregressive (GVAR) model of 33 countries and analyze the response of real Gross Domestic Product (GDP) to uncertainty shocks associated with the U.S. as well as the domestic economy, conditional on the state of the Global Financial Cycle. While our findings confirm the dominant role of U.S. uncertainty over global economic dynamics, we show that the global financial cycle plays a moderating role over the spillover effects of such shocks. U.S. uncertainty shocks, compared to own domestic uncertainty shocks, are found to have a more prominent negative impact on output, during overstressed financial markets implied by the low values of the GFCy, while the impact turns largely insignificant during high global financial cycle states. The effects are particularly evidence in the case of the European and other G7 economies, highlighting the strong connection across these developed economies compared to their emerging counterparts. Overall, the findings provide evidence in favor of a U.S. uncertainty spillover multiplier, suggesting that the design of expansionary monetary policy as a response to U.S. uncertainty needs to be contingent on the state of the integrated global financial markets, captured by the global financial cycle.