Nonlinear Spillover Effects of US Financial Uncertainty

We show that US financial uncertainty has nonlinear spillover effects on the conditional distribution of forecasted GDP growth worldwide. This nonlinearity stems from asymmetric responses of domestic and international credit conditions following a US financial uncertainty shock. Through the international credit channel, market participants’ pessimistic expectations regarding future economic conditions amplify the tightening effect of US financial uncertainty on credit conditions considerably, leading to a severe global economic slowdown. Moving beyond the conventional paradigm to examine the central tendency of the projection, we show that US financial uncertainty has nonlinear spillover effects on the entire conditional distribution based on a panel of 30 economies over nearly three decades. In times of pessimism, a rise in US financial uncertainty shifts the entire conditional distribution to the left, causing future economic growth to worsen. In times of optimism, heightened US financial uncertainty stretches out the conditional distribution but only lowers the conditionalmedian mildly, implying an increasingly uncertain future