Uncertainty Signals and Real Economic Activity of Interconnected Economies : A Global VAR Analysis

We investigate the international shock propagation of the US quality of political signals (USQPOLS) to developed and emerging economies. We find an immediate rise in the real GDP of the developed economies as a result of a unit shock to USQPOLS. However, the shock effect only becomes significant at a later period for the emerging economies when the USQPOLS is partitioned into high and low levels. We also find contrasting evidence between high and low levels of the USQPOLS where the improved quality of political signals tends to raise the level of real GDP while the reverse holds for the poor quality of political signals. Therefore, ignoring the asymmetric role of high and low levels of USQPOLS may lead to wrong conclusions