Analyzing the degree of persistence of economic policy uncertainty using linear and non‐linear fourier quantile unit root tests

Abstract

AbstractThis research analyzes the degree of persistence of the economic policy uncertainty (EPU) index for 23 countries using two novel quantile unit root tests that allow for smooth breaks and quantile‐specific stochastic behavior. After executing conventional linear and non‐linear unit root tests, we find scant evidence in favor of stationarity of the EPU indices, yet applying the quantile unit root test with smooth breaks presents more evidence in favor of stationarity. Our results indicate that the EPU index series of these countries respond differently to positive shocks, which may result in a jump in uncertainty. For some countries like the UK, positive shocks to EPU have transitory effects and disappear in the short run, whereas for 10 countries such as China, the positive shocks have long lasting (persistence) effects. Our results offer important policy implications.