The Impact of Domestic Economic Policy Uncertainty on Trade and Investment Within the G20

Economic Policy Uncertainty (EPU) has long been established as a reason for declining private domestic investment and firm performance in many economies. Policy uncertainty can arise due to unclear government rules regarding fiscal, monetary or trade policies. Unanticipated and frequent changes to rules can create volatility in economic policy. This Policy Brief uses news-based indices of EPU to study its spillover effect among G20 countries. It also identifies the directionality of the volatility spillover, using the financial connectedness frameworks present in finance literature. It finds that among 14 G20 countries, 23 percent of the average dynamic policy uncertainty can be explained by spillover from other countries; Australia, Brazil, Canada, China, India, Japan, South Korea, and the US are net exporters of policy uncertainty while the rest of the G20 are net importers of uncertainty. Furthermore, shocks to domestic EPU impact the export growth rate for up to two financial years.