Does US Partisan Conflict Matter for the Euro Area?

Abstract

This paper highlights the international transmission of political uncertainty originated from a US partisan conflict shock, a newly identified shock that transmits a type of uncertainty beyond the economic policy uncertainty spillovers identified by Colombo (2013). Using the recently developed US Partisan Conflict Index (USPC) developed by Azzimonti (2014), we find that a one standard deviation USPC shock leads to a 0.2 percent decline in European industrial production. We also show that, compared with US policy uncertainty shocks, a shock to US partisan conflict creates deeper and more persistent spill-over effects to the Euro area.

Keywords: Partisan conflict, Economic policy uncertainty, U.S.-Euro area spillovers, Bayesian VAR

JEL Classification: E32, F42, D72