The international spill-over effects of US political signal quality: A GVAR approach

The quality of political signals, reflecting policy clarity and credibility, remains a distinct but underexplored dimension of uncertainty in international studies. We investigate the influence of the quality of political signals (Q-index) in the United States (US) on the equity markets of 32 advanced and emerging economies using the Global Vector Autoregressive (GVAR) model, which also accounts for the macroeconomic conditions of the shock-recipient markets. We show an immediate negative impact on equity markets, with a response of about 0.15% to a one-standard-deviation shock to the US Q-index. However, we find clear asymmetry after decomposing the index into high- and low-quality regimes: low-quality shocks on average raise foreign equity prices by up to 0.12% but act slowly, whereas high-quality shocks reduce equity prices by a ­comparable magnitude but transmit more quickly. Both effects operate through the exchange-rate channel. Additional evidence involving the Global Economic Policy Uncertainty (GEPU) index reveals a contrasting pattern: GEPU shocks affect real equity prices directly and instantaneously, without exchange-rate mediation, highlighting the distinct transmission channel through which ­political signal quality operates. Our findings suggest that ­monetary authorities in trade-linked economies should monitor US political communication quality as a leading indicator of exchange-rate and equity-market pressure.