Hikes in policy uncertainty

Indeed, some political parties in the latter two countries had promised
radical changes on issues such as defence, tax and immigration policies if they
were elected, and polls were somewhat unclear about the election outcomes. In
addition to this, EPU has been shown to be transmitted from the largest
economies of the EU to other EU countries.

Therefore, it seems likely that the
stubbornly high levels of EPU in stable countries are related to the Brexit
negotiations.

To verify this, we model EPU transmissions from the UK to the
largest EU countries, taking both time variation and conditional heterogeneity
into account . Our results are based on monthly data and indeed
reveal a persistently positive pattern. UK EPU is transmitted to EPU in Germany
and France in particular, to a lesser extent to Spain and to the least extent to
Italy.

For all countries, though, UK EPU transmissions reached a peak around
the Brexit vote. In this vein, the UK seems to be a net exporter of policy
uncertainty. Taking the potential pro-cyclicality of EPU into account, these
transmissions can impede and adversely affect economies and markets.

Therefore, economic policy coordination and convergence among the remaining
EU states are important to effectively reduce EPU and thereby minimise
financial stability risks.