Monetary policy and uncertainty spillovers: Evidence from a wavelet and frequency connectedness analysis

Interconnected financial markets, especially those stemming from changes in monetary policy or shifts in financial, political, or geopolitical conditions, ease the transmission of spillovers. Understanding these dynamics is crucial for policymakers and investors. Therefore, identifying cross-country spillovers across time and frequency domains, along with assessing the role of monetary policy during periods of economic instability and escalating geopolitical risk, holds significant importance. This study contributes to the literature by revealing important aspects of network connectedness among monetary policy and uncertainty indices, in terms of frequency and time horizon, for the US and the UK, over the period 2014–2023. First, we find stronger interdependence between the series in the long term, with short-medium run connectedness prevailing during specific periods and events, such as Brexit, the COVID-19 pandemic, and the Russian-Ukrainian War. Second, shadow short rates often receive spillovers from financial stress in the short-medium term but transmit spillovers in the long term, implying the stabilizing influence of monetary policy in the long run. Third, geopolitical risk is responsible for most of the spillovers reflected in financial and economic uncertainty in 2022, and finally, the US emerges as the dominant transmitter of spillovers to the UK. • The interdependence among monetary policy and uncertainty indices varies with time and frequency. • Short-medium term connectedness prevailed during several events. • Shadow short rates receive spillovers from financial stress in the short-medium term but transmit spillovers in the long term. • Geopolitical risk is the main net transmitter of shocks to financial stress and EPU in the Russian invasion of Ukraine. • Financial stress is the main long-term net transmitter of shocks in COVID-19.