The lead-lag relationship of US fiscal policy uncertainty: New evidence from R2 decomposed connectedness measures

Abstract

This study examines the dynamic interdependencies between US fiscal policy uncertainty, federal funds effective rate, industrial production, gross federal debt, VIX, and WTI crude oil using monthly data from February 1990 to May 2025. We employ the recently developed R² decomposed connectedness approach of Balli et al. (2023), which decomposes interdependencies into contemporaneous and lagged components. Our empirical findings show that dynamic total connectedness is heterogeneous over time and economic event-dependent. Notably, contemporaneous dynamics dominate lagged dynamics. Fiscal policy uncertainty, gross federal debt, federal funds effective rate, and WTI act as net transmitters of shocks, while industrial production and the VIX are net receivers of shocks. However, in the context of contemporaneous spillovers, we find that fiscal policy uncertainty primarily absorbs shocks rather than transmitting them, highlighting its reactive role and underscoring the need for well-designed policy responses to address fiscal uncertainty