Economic policy uncertainty spillovers in small open economies: The case of Hong Kong

Abstract

This paper studies the extent to which economic policy uncertainty shocks in major economies affect real economic activity in small open economies. We use Hong Kong as a case study. Following Baker, Bloom and Davis (2016), we construct a newspaper‐based economic policy uncertainty index for Hong Kong for the period 1998 to 2016. We estimate international spillovers of uncertainty and find large spillovers of uncertainty from major economies to Hong Kong. Furthermore, using a structural vector autoregressive approach, we show that a rise in domestic economic policy uncertainty leads to tight financial conditions, and lower investment and vacancy posting, dampening domestic output growth.

Economic Policy Uncertainty Linkages among Asian Countries: Evidence from Threshold Cointegration Approach

“…erefore, the abovementioned findings suggest both unidirectional and bidirectional movements between the EPUs of the countries in the short run either in the same or opposite direction to the bidirectional movements. In summary, movements in India's EPU affect China's EPU in the short run but not in the reverse case; while there is no significant short-run relationship between China's and Japan's EPUs, Japan influences China's EPU in the long run and this is consistent with Bai et al [53] who found China to be the principal receiver of EPU spillover. For the case of China-Korea and India-Korea EPU pairs, there is a bidirectional movement between the pairs but in the opposite direction.…”

“…For example, Klößner and Sekkel [36] used the policy uncertainty index to examine cross-country EPU effects of six developed countries and found evidence of a significant spillover effect of policy uncertainty from the US and the United Kingdom (UK) to other countries which are the recipients of policy uncertainty shock during and after the crises period. Luk et al [53] studied EPU spillovers of US, Europe, Mainland China, and Japan in small open economies, using Hong Kong as a case study. ey constructed EPU for Hong Kong from 1998 to 2016 and found large spillovers of uncertainty from major economies to Hong Kong.…”

Unraveling the Causal Relationship Between Economic Policy Uncertainty and Exchange Market Pressure in BRIC Countries: Evidence From Bootstrap Panel Granger Causality

“…Other channels include policy interest rate, long-term interest rates, international bank lending, and both short-and long-term portfolio flows (Aizenman & Binici, 2016). The foreign exchange rate becomes susceptible to GEPU via trade and financial openness, free capital mobility, and operation of large financial and external sectors (Georgiadis, 2016;IMF, 2013;Luk et al, 2017).…”

Uncertainty in an emerging market economy: evidence from Thailand

“…Finally, we contribute to a fast growing literature on the cross-border effects of global uncertainty shocks. Theoretically, foreign uncertainty shocks from major economies can transmit to small open economies through channels such as global banks or cross-border lending (Fernàndez-Villaverde et al 2011;Benigno et al 2012;Luk 2017). Empirically, cross-border effects of uncertainty shocks that originate from the US have been shown to be significant drivers of important economic variables for the UK (Mumtaz and Theodoridis 2015), Europe (Colombo 2013), China (Huang et al 2018), Hong Kong (Luk et al 2017) and Australia (Moore 2017), and in most cases, they even dominate the effects of local uncertainty shocks.…”