Does US partisan conflict matter for the Euro area?

- We investigate how US partisan conflict affects the Euro area economy.
- We document a negative and significant effect on European industrial production.
- The effect is deeper and more persistent than a US policy uncertainty shock.
- US partisan conflict is a significant source for European variable fluctuations.

This paper highlights the international transmission of political uncertainty originated from a US partisan conflict shock, a newly identified shock that transmits a type of uncertainty beyond the economic policy uncertainty spillovers identified by Colombo (2013). Using the recently developed US Partisan Conflict Index (USPC) developed by Azzimonti (2014), we find that a one standard deviation USPC shock leads to a 0.2 percent decline in European industrial production. We also show that, compared with US policy uncertainty shocks, a shock to US partisan conflict creates deeper and more persistent spill-over effects to the Euro area.