Economic Policy Uncertainty, Political Uncertainty and the Greek Economic Crisis

Abstract

We use textual analysis to construct an index of economic policy uncertainty (EPU) for Greece from 1/1998 to 12/2017, similar to other international EPU indices. We also construct indices of political uncertainty (POLU) and economic uncertainty (EU), plus EPU sub-indices related to fiscal policy (EPUF), monetary policy (EPUM), banking (EPUB), currency or Grexit possibility (EPUC), and pension policy (EPUP). The indices are positively correlated yet retain substantial idiosyncratic variability. With the exception of EPUM, they all rose during the international and subsequent Greek crisis. There is also positive correlation of EPU with international EPU indices, which rose in the international crisis but, as expected, declined during the Greek crisis. Positive shocks to EPU and to the other indices are associated with a subsequent decline in investment, industrial production, GDP, employment, household deposits, economic sentiment and the stock market, and with an increase in bond yields. These shocks go a long way to explain not only the direction but the magnitude of the changes in macro and financial variables during the crisis. A VAR forecast error variance decomposition over a three-year horizon suggests uncertainty together with bond yields may explain not only the depth but the length of the crisis as well.