Analysis of effect of global uncertainty on domesticuncertainty using connectedness index

초록

This study estimates connectedness index among the US, China, Europe, Japan, and South Korea usingmonthly economic policy uncertainty (EPU) data from January 2000 to December 2023. The connectedness in-dex allows us to analyze the effect of global economic uncertainty on domestic economic uncertainty. The EPUis used as a proxy for economic uncertainty. Inter-country connectedness index is computed from variance de-composition. The findings from forecast error variance decomposition show that three-fourths of total uncertaintycomes from economic uncertainty in the own country and one-fourth of total uncertainty comes from economicuncertainty in the others. The analysis on net pairwise connectedness reveals that, even though the extent of theeffect of economic uncertainty in one country from economic uncertainty in another country varies over time,economic uncertainty in South Korea, a small-open economy, is mainly affected by economic uncertainty in theothers. The reverse situation rarely happens except in the specific occurrence such as the collapse of the creditbubble in 2003 and the subsequent years, the inter-Korean summit and North Korea-the US summit in 2018, andthe period from the first outbreak of COVID-19 on the implementation of the government's severe regulationagainst COVID-19.

키워드