Spillovers and Connectedness of Economic Policy Uncertainty and Inflation Volatility: Evidence from Advanced Economies and Nigeria

Abstract

This study examines the spillovers and connectedness among economic policy uncertainty of advanced economies, Nigeria's inflation volatility, inflation rate and output growth rate. For this purpose, we adopt time-varying parameter vector auto regression (TVP-VAR) using data between January, 1995 and December, 2019. We observe that there are evidence of bidirectional spillovers among variables. Inflation volatility contributes the highest to the forecast error variance of inflation rate and inflation rate also contribute the highest to the forecast error variance of inflation volatility. We also observe the presence of bidirectional spillover between economic policy uncertainty of US and Europe. We also observe that, when compared with economic policy uncertainty of advanced economies, Nigeria's inflation rate and output growth rate contributes more to the forecast error variance of inflation volatility. Although, among the economic policy uncertainty, Europe economic policy uncertainty contributes the highest to the forecast error variance of Nigeria's inflation volatility. The findings would help policymakers understand that, policy induced uncertainty from advanced economies influences Nigeria's inflation fluctuations and that Nigeria's inflation fluctuation is more sensitive to domestic economic variables.