  No matter its source, financial- or policy-related, uncertainty can feed onto
itself, inflicting the real economic sector, altering expectations and
behaviours, and leading to identification challenges in empirical applications.
The strong intertwining between policy and financial realms prevailing in
Europe, and in Euro Area in particular, might complicate the problem and create
amplification mechanisms difficult to pin down. To reveal the complex
transmission of country-specific uncertainty shocks in a multi-country setting,
and to properly account for cross-country interdependencies, we employ a global
VAR specification for which we adapt an identification approach based on
magnitude restrictions. Once we separate policy uncertainty from financial
uncertainty shocks, we find evidence of important cross-border uncertainty
spill-overs. We also uncover a new amplification mechanism for domestic
uncertainty shocks, whose true nature becomes more blurred once they cross the
national boundaries and spill over to other countries. With respect to ECB
policy reactions, we reveal stronger but less persistent responses to financial
uncertainty shocks compared to policy uncertainty shocks. This points to ECB
adopting a more (passive or) accommodative stance towards the former, but a
more pro-active stance towards the latter shocks, possibly as an attempt to
tame policy uncertainty spill-overs and prevent the fragmentation of the Euro
Area financial markets.
