Analysis of effect of global uncertainty on domestic uncertainty using connectedness index

This study estimates connectedness index among the US, China, Europe, Japan, and South Korea using monthly economic policy uncertainty (EPU) data from January 2000 to December 2023.The connectedness index allows us to analyze the effect of global economic uncertainty on domestic economic uncertainty.The EPU is used as a proxy for economic uncertainty.Inter-country connectedness index is computed from variance decomposition.The findings from forecast error variance decomposition show that three-fourths of total uncertainty comes from economic uncertainty in the own country and one-fourth of total uncertainty comes from economic uncertainty in the others.The analysis on net pairwise connectedness reveals that, even though the extent of the effect 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 the others.The reverse situation rarely happens except in the specific occurrence such as the collapse of the credit bubble in 2003 and the subsequent years, the inter-Korean summit and North Korea-the US summit in 2018, and the period from the first outbreak of COVID-19 on the implementation of the government's severe regulation against COVID-19.