The effects of economic policy uncertainty on European economies: evidence from a TVP-FAVAR

We use a time-varying parameter FAVAR model to investigate the effects of economic policy uncertainty (EPU) on a wide range of macroeconomic variables for eleven European Monetary Union (EMU) countries. First, we are able to distinguish between a group of fragile countries (GIIPS countries) and a group of stable countries (northern countries), where the former suffered the most due to EPU shocks. Second, we find that EPU shocks affect financial markets as well as the real economy and that private investors and financial market participants react more sensitively than consumers to EPU shocks. Third, we discover that the transmission of EPU shocks is quite stable over time.