Asymmetrical Spillover Effects of Policy Uncertainty and Macroeconomic Shock Transmission Across Economies

Amid rising global uncertainties and shifting economic alliances, understanding the dynamic transmission of macroeconomic shocks is essential for informed and resilient policy-making. This study explores the evolving macroeconomic connectedness among the largest four economies using a Time-Varying Parameter Vector Autoregression (TVP-VAR) framework. By analyzing key uncertainty indices such as Economic Policy Uncertainty (EPU), Trade Policy Uncertainty (TPU), and macroeconomic indicators such as GDP, FDI, and trade flows reveal time-varying, variable-specific patterns of shock diffusion across countries. Our findings reveal the scalability impact of asymmetric shock transmissions across them. The EPU shock is mainly transmitted by the U.S., and China is at the receiving end. Contradicting the TPU shock pattern between these two countries. This shows that the policy adoption by the U.S. is actively reshaping its trade dynamics to become a secure trade partner, while China's intricate link to its global trade drives this TPU shocks outflow. On the other side, India acts as a major export shock transmission, followed by Germany, while import shocks are transmitted by the U.S. and China. These asymmetrical spillover effects highlight the policy implications, like diversifying trade partnerships and engagement through regional and plurilateral agreements, with stable trade partnerships across countries. Focusing on sector-specific trade agreements can help build resilience amid uncertainty. Additionally, reducing reliance on high-risk partners, diversifying value chains, and strengthening critical sectors are key strategies to mitigate external shocks and build sustainable long-term economic stability. JEL Classification E02, F01, F13, F14, D80