Economic Policy Uncertainty in Central America and the Dominican Republic

Spillover effects of policy uncertainty on the foreign exchange rate: Evidence from selected developed and developing countries

The advent of Big Data and computational tools has transformed macroeconomic analysis, introducing real-time, high-frequency text-based indicators such as the economic policy uncertainty (EPU) index pioneered by Baker et al. (2016). However, constructing the EPU index for developing economies remains a challenge, mostly due to limited press coverage. Our study focuses on the Central American region, comprising Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Panama and the Dominican Republic (CAPADR). We construct country-specific EPU indices using a combination of local and regional sources and validate them using the narrative approach in order to ensure variation accurately reflects relevant economic policy events. We offer further empirical validation by computing impulse response functions for key macroeconomic variables, at both country and representative country level. We show that EPU shocks lead to a decline in economic activity, foreign direct investment (FDI) and tourism levels. Our findings underline the importance of EPU monitoring in Central America and offer a solution through our indices.

Economic Policy Uncertainty and Household Inflation Uncertainty

This chapter determines and compares the responses of South African economic growth to positive (i) foreign economic policy uncertainties (ii) foreign GDP growth uncertainties and (iii) foreign GDP growth shocks. Does South African economic policy uncertainty act as an inward transmitter and conduit of foreign economic policy uncertainty shock to the domestic GDP growth? Do foreign GDP growth uncertainties act as transmitters and conduits of foreign economic policy uncertainty shock to the South African GDP growth? Does a combination of economic growth uncertainty and policy uncertainty impact domestic exports growth? Evidence in this chapter confirms that economic policy uncertainty tends to exert negative effects on foreign economic growth in this chapter. The negative spillover of foreign policy uncertainty results in a contraction in South African economic growth. In addition, the South African economic policy uncertainty acts as an inward transmitter and conduit of foreign economic policy uncertainty shock to domestic GDP growth. At the same time, foreign GDP growth uncertainties transmit foreign economic policy uncertainty shock to South African GDP growth. However, the big decline in the actual GDP growth than the counterfactual responses implies that South African policy uncertainty leads to the worsening in economic growth contraction following the foreign policy uncertainty shock. Furthermore, positive European GDP growth raises South African exports to the Euro area and the increases are much higher in the long run when South African policy uncertainty is shutoff than when operating in the model. This shows that the exports channel explains why South African economic growth may not benefit to the maximum from the improvement in European GDP growth impulse.

Green bond and green stock in China: The role of economic and climate policy uncertainty

Facing with the complicated global situation, many countries change the economic policies at any time. The uncertainty of economic policies will increase, and the uncertainty risk will increase accordingly. The trade share between China and ASEAN was the largest in recent years, which showed the closeness and importance of the economic and trade cooperation between China and ASEAN. The macro-economy policies, trade policies and regional cooperation of China and ASEAN, will affect interests of both parties. Therefore, this paper aims to analyze the impact of the uncertainty of China's economic policy on the export trade between China and ASEAN. By using the uncertainty index of China's economic policy measured by Baker et al (2016)^[1] in 2003-2020, this paper makes an empirical analysis of the impact of the uncertainty of China's economic policy on the export volume of China to ASEAN. The results show that, the uncertainty of China's economic policy has a negative impact on China's export trade to ASEAN. Therefore, to better safeguard the export trade between China and ASEAN, methods such as joining the regional economic integration organization, optimizing the export industry structure, enhancing the innovation ability, and improving the institutional environment should be adopted to reduce the losses caused by the uncertainty risks of economic policies.

Based on the data of China manufacturing listed companies from 2006 to 2018, this paper studies the influence of economic policy uncertainty on the competitive effect of cash holding through capital investment. The results show that cash holding has a positive competitive effect, and capital investment plays an intermediary role in the competitive effect. The positive competition effect of cash holding is stronger when the uncertainty of economic policy is low than when the uncertainty of economic policy is high, and the uncertainty of economic policy strengthened the intermediary role of capital investment in the positive competition effect of cash holding. The conclusion of this paper provides a new way to understand the increasing cash holdings of enterprises, and has guiding significance for enterprises to make cash holdings strategy under the uncertainty of different economic policies.

Purpose Drawing on theoretically grounded hypotheses, this paper aims to compares the linear and asymmetric impact of Economic Policy Uncertainty (EPU) and Climate Policy Uncertainty (CPU) on firms’ attention to climate change-related opportunities. Design/methodology/approach The authors focus on a sample of German-listed firms observed from the first quarter of 2010 to the second quarter of 2022. The system GMM is used with standard error estimates robust to heteroskedasticity and autocorrelation within panels. The authors run robustness tests to explore issues that have been insufficiently addressed by the literature. Findings The linear estimation reveals that policy uncertainty exerts a positive effect on firms’ attention to climate opportunities, with CPU exerting stronger impact than EPU. The asymmetric estimators show that firms tend to increase their attention to climate-related opportunities when EPU rises, and are more likely to reduce this attention when CPU decreases. The attention of firms, operating in the manufacturing industry, to climate change-related opportunities is found to be more sensitive to uncertainty than that of firms in other sectors. The positive impacts of EPU and CPU are endogenous to physical and transitional climate risk. Research limitations/implications The results imply that market pressure should remain a key driver of corporate innovation in green technologies and act as a substitute during periods of lower economic policy uncertainty, to sustain firms’ attention to climate issues. Stronger safeguards should be implemented during times of decreased uncertainty, particularly those linked to pro-environmental regulations, legislation and the energy transition. Originality/value This paper explores explicitly the impact of uncertainty on firms’ engagement with low-carbon strategies rather on broader environmental metrics. It introduces a dual-uncertainty framework by using both Economic Policy Uncertainty (EPU) and Climate Policy Uncertainty (CPU) indices. It investigates the asymmetric effects of uncertainty which have not yet been explored in the context of firms’ commitment to climate change.

Frequent changes in economic policies will bring negative effects on the micro operating environment of banks. In this context, the functional effects of asset securitization create conditions for banks to effectively resist the adverse impact of economic policy uncertainty. In view of this, this paper examines the impact of economic policy uncertainty on the development of asset securitization of banks based on the related chain of “economic policy uncertainty—bank micro behavior change—asset securitization development”. It is found that the increase of economic policy uncertainty significantly promotes the development of bank asset securitization. Further, this paper discusses the internal mechanism of the positive impact, and finds that the adverse impact of economic policy uncertainty on the term mismatch, risk-taking and profitability of banks is an important motivation for banks to develop asset securitization, which confirms the original logic of the article, that is, the adverse impact of economic policy uncertainty on the micro operating environment of banks constitutes a series of motives for the development of bank asset securitization, and fully explains that the functional system of asset securitization can be an effective way for banks to cope with frequent policy changes. Finally, this paper studies the corresponding heterogeneity characteristics, and finds that economic policy uncertainty promotes the development of bank asset securitization, which is more significant in non-listed banks and small and medium-sized banks, because these banks lack sufficient adjustment means to adapt to the unstable political environment, and they need to use the functional system of asset securitization to deal with economic policy uncertainty. Therefore, it has a stronger impetus for the development of asset securitization.This paper holds that the main purpose of developing asset securitization is to deal with the uncertain external environment and its adverse impact on its own microstructure. Under the background that the outbreak of the COVID-19 Epidemic has led to the increase of economic policy adjustment and policy uncertainty, the regulatory authorities should not only continuously improve the institutional space for the effective function of asset securitization, but also pay attention to the “double-edged sword” feature of asset securitization, and strive to create a transparent and fair policy environment and stabilize the bank’s expectation of future policies. The conclusion of this paper expands the research field of bank asset securitization from the perspective of economic policy uncertainty, and deepens the cognition of the effect of economic policy uncertainty on bank behavior, which provides useful enlightenment for making the development strategy of asset securitization scientifically, and stabilizing bank behavior through the development of asset securitization under the background of the frequent adjustment of policies caused by the COVID-19 Epidemic.

The dampening effect of geopolitical risk and economic policy uncertainty in the linkage between economic complexity and environmental degradation in the G-20

There is a growing interest among economists and policymakers in examining economic (policy) uncertainty and its effects on the (overall) economy. This study examines the economic (policy) uncertainty in Brazil, the most populated country in Latin America, before and during the Covid-19 crisis, which has severely affected the Brazilian economy and society. Brazil was the first country in Latin America to report a confirmed case of Covid-19. This study finds that the Covid-19 crisis has contributed to an increase in economic (policy) uncertainty in Brazil. However, the increase was (more or less) short-lived. Data show that economic uncertainty in Brazil was at its peak in April 2020 and that economic policy uncertainty in Brazil was at its peak in March 2020.

The severe challenges posed by the environmental crisis and climate change have stimulated the development of the green bonds (GB) market aimed at providing bridging financing for carbon reduction. This investigation employs the wavelet-based quantile-on-quantile method to probe the asymmetric impacts among economic policy uncertainty (EPU), climate policy uncertainty (CPU) and GB. The empirical findings demonstrate that EPU and CPU have time-varying impacts on GB across different time scales. In the short term, the negative effects of EPU and CPU predominantly influence the GB market. In the long term, EPU and CPU have positive effects on the GB market during bullish market conditions but negative effects during bearish market conditions. These outcomes indicate that GB cannot always be deemed a diversifier for EPU and CPU shocks. These outcomes deviate from the Intertemporal Capital Asset Pricing Model (ICAPM) model’s conclusions, which emphasize uncertainties’ positive influence on the GB market. Policymakers can incorporate these findings into policy design to mitigate risks stemming from uncertainty and promote the GB market growth. Furthermore, investors should consider the effects of uncertainty to optimize their investment strategy and obtain higher returns.

PurposeUnder the background of the overall increase of China's economic policy uncertainty and the urgent need for the transformation and upgrading of the substantial economy, this paper studies the time-varying causality between China's economic policy uncertainty and the growth of the substantial economy through bootstrap rolling window causality test, further refines economic policies and studies the causal differences between different types of economic policies and substantial economic growth, refining the conclusions of previous studies.Design/methodology/approachThis paper first studies the causal relationship between China's economic policy uncertainty and substantial economic growth in the full sample period through bootstrap Granger causality test. Then, the paper tests the short-term and long-term stability of the parameters of the VAR model, and it is found that the model parameters are unstable in both the short and long term, so the results of the Granger causality test of the full sample are not credible. Finally, we conduct a dynamic test of the causal relationship between China's economic policy uncertainty and substantial economic growth by means of rolling window, so as to comprehensively analyze the dynamic characteristics and sudden changes of the relationship between them.FindingsThe research shows that economic policy uncertainty in China has a significant inhibiting effect on the growth of substantial economy. Growth in the substantial economy will drive up economic policy uncertainty before 2016 and restrain it after that. In addition, this paper further subdivides economic policy uncertainty to explore the causal differences between different types of economic policy uncertainty and substantial economic growth. The test results show that the relationship between them has obvious policy heterogeneity. The fiscal policy uncertainty and the monetary policy uncertainty, as the main policy means in China, has a significant impact on the growth rate of substantial economy in multiple ranges, but the effect time is short. Although trade policy uncertainty has a significant impact on the growth rate of substantial economy only during the financial crisis, the effect lasts for a long time. The impact of exchange rate and capital account policy uncertainty on the growth rate of substantial economy is mainly reflected after 2020.Originality/valueThe values of this paper are as follows: First, the economic policy uncertainty is combined with the growth of substantial economy, which makes up the gap of previous studies. Second, the economic policy uncertainty is further subdivided. The paper explores the causal differences between different types of economic policy uncertainties and the growth of substantial economy, so as to make the research more detailed. Finally, different from the previous static analysis, this paper uses dynamic model to examine the relationship between China's economic policy uncertainty and the growth of substantial economy from a dynamic perspective, with richer research conclusions.

Policy uncertainties can directly affect the outcomes of policies to be implemented and other related policies. Therefore, it is important to reduce policy uncertainties. Identifying policy uncertainties and related factors is important in this regard. This study examines the impact of economic and monetary policy uncertainty on climate policy uncertainty in the United States. The relationship between the variables is examined asymmetrically using monthly data for 1988-2022. First, the “Augmented Dickey-Fuller Unit Root Test” and the “Fractional Frequency Fourier Augmented Dickey-Fuller Unit Root Test” are applied. The Asymmetric Wavelet Transform Coherence Test is also used to determine the direction and frequency of the relationship between the variables. Asymmetric time-varying causality analysis was used for the causality dimension. The significant relationship between “economic policy uncertainty”, “monetary policy uncertainty” and “climate policy uncertainty” varies at different time periods.

This study aims to examine the long-term and short-term diverse effects of economic policy uncertainty, trade policy uncertainty, and financial market uncertainties on the import performance of advanced economies. It employs the Pooled mean group autoregressive distributed lag (PMG/ARDL) method for the panel of 27 advanced economies using quarterly data from the first quarter of 1996 to the fourth quarter of 2020. The study's results reveal that local and global economic and trade policy uncertainties have significant adverse long-term effects on the import performance of advanced economies. Besides, financial market uncertainties negatively impact advanced economies’ imports in the long run. Nonetheless, the results imply that domestic economic and trade policy uncertainties positively affect imports in the short run. Moreover, the Dumitrescu-Hurlin (D-H) panel causality test indicated that bidirectional causality exists between financial market and trade policy uncertainty indicators and imports. However, unidirectional causality exists between economic policy indicators and imports. The results are consistent across different sensitivity analyses. Based on these findings, we propose policy implications to control economic, trade and financial market uncertainties and thereby alleviating their impact on the import performance of advanced economies.