Domestic Economic Policy Uncertainty Research Articles

Volatility dynamics in energy and agriculture markets: An analysis of domestic and global uncertainty factors

Purpose This study aims to explore the intricate relationship between uncertainty indicators and volatility of commodity futures, with a specific focus on agriculture and energy sectors. Design/methodology/approach The authors analyse the volatility of Indian agriculture and energy futures using the GARCH-MIDAS model, taking into account different types of uncertainty factors. The evaluation of out-sample predictive capability involves the application of out-sample R-squared test and computation of various loss functions. Findings The research outcomes underscore the significant impact of diverse uncertainty factors such as domestic economic policy uncertainty (EPU), global EPU (GEPU), US EPU and geopolitical risk (GPR) on long-run volatility of Indian energy and agriculture (agri) futures. Additionally, the study demonstrates that GPR exhibits superior predictive capability for crude oil futures volatility, while domestic EPU stands out as an effective predictor for agri futures, particularly castor seed and guar gum. Practical implications The study offers practical implications for market participants and policymakers to adopt a comprehensive perspective, incorporating diverse uncertainty factors, for informed decision-making and effective risk management in commodity markets. Originality/value The research makes an inaugural attempt to examine the impact of domestic and global uncertainty indicators on modelling and predicting volatility in energy and agri futures. The distinctive feature of considering an emerging market also adds a novel dimension to the research landscape.

Research on the Dynamic Interrelationship between Economic Policy Uncertainty and Stock Market Returns

This paper employs the Panel Vector Autoregression (PVAR) method to examine the dynamic interrelationship between Economic Policy Uncertainty (EPU) and stock market returns. The existing literature has not reached a consensus on the relationship between EPU and stock market returns, and there is a lack of comparative analysis of domestic and foreign EPU. Therefore, this paper is the first to incorporate domestic and foreign EPU, stock market returns, and output into a unified framework, considering the dual impact of domestic and foreign EPU shocks. Additionally, the generalizability of the results is ensured by including a large sample of nine emerging and eleven advanced economies. The main findings are as follows: First, a positive shock to foreign EPU leads to a decline in stock market returns and is stronger than the impact of domestic EPU. Second, a positive shock to stock market returns reduces both domestic and foreign EPU. Third, a rise in stock market returns promotes domestic output growth, while increases in domestic and foreign EPU suppress domestic output growth. Finally, the United States is a net exporter of EPU rather than a net importer.

Economic policy uncertainty and Indian equity sectors: a quantile regression approach

Purpose This paper aims to investigate the effect of economic policy uncertainty (EPU) shocks on Indian equity market sectors. The effect of domestic (Indian) and foreign (USA) EPU shocks is examined on ten major Bombay Stock Exchange sectors. Design/methodology/approach The study uses data covering the period from September 2005 to July 2023 and uses the methodology of quantile regression to investigate the heterogenous response of stock market sectors under diverse market conditions explained through the analysis of conditional quantiles distribution. Findings The results demonstrate that domestic and foreign EPU shocks negatively affect most of the sectors in bearish market conditions. Industrials, commodities, utilities, consumer discretionary and financial services are the most affected sectors by domestic EPU. However, the information technology sector is found to be immune to domestic EPU shocks but negatively affected by foreign EPU shocks. On the other hand, energy, financial services and fast-moving consumer goods sectors are found to be immune to foreign EPU shocks but are negatively affected by domestic EPU shocks. Practical implications Understanding the heterogeneous response of different sectors to EPU shocks could help investors and portfolio managers identify portfolio diversification opportunities. Originality/value This study makes an inaugural attempt to examine the responses of Indian stock market sectors to domestic and foreign EPU shocks using the approach of quantile regression and unveils the previously unexamined diverse reactions of Indian stock market sectors to EPU shocks originating from both India and USA.

International economic policy uncertainty and analysts' earnings forecasts

We investigate the extent to which international economic policy uncertainty (EPU) impacts analysts' earnings forecasts. Using a sample of Australian firms, we demonstrate that EPU is positively associated with the size of forecast errors and the extent of forecast dispersion. Consistent with Australia being a relatively small but open economy, we show that this EPU effect extends beyond domestic EPU to include global and country-specific EPU, most notably Chinese and US EPU. The effect of international EPU is stronger for short-term forecasts, and for firms with higher growth prospects and profitability. However, the effect of Australian EPU is more pronounced for longer horizon forecasts and for firms in the resources and mining industries, and those with lower growth and profitability. Our results are consistent with heightened international EPU negatively impacting firms' information environment, with increased variation in market participants' beliefs.

Dynamic impacts of multidimensional uncertainty on the renminbi exchange rate: Insights from time-varying analysis

Using a time-varying model, this study investigates the dynamic impact of multidimensional uncertainty by considering data from the policy, finance, and energy markets on the renminbi (RMB) exchange rate from 2001 to 2022. It analyzes specific influence patterns during critical economic periods. We find that multiple dimensions of uncertainty influence the RMB exchange rate rapidly and that these influences exhibit notable temporal variation. (1) The dynamic impact of economic policy uncertainty (EPU) on the RMB exchange rate depends not only on the magnitude of EPU but also on the divergence between domestic and global EPU (also called relative uncertainty). When the domestic EPU is lower than its global counterpart, it can still promote RMB appreciation, even at high levels. (2) The dynamic effect of stock market uncertainty depends on the balance between asset substitutability and risk contagion. The dominance of asset substitutability triggers RMB appreciation during periods of stock market uncertainty. (3) The escalation of energy market uncertainty significantly increases the value of the RMB; this effect is especially pronounced after the financial crisis. Against the backdrop of heightened global economic uncertainty and the significant challenge of maintaining exchange rate stability, regulators should focus on the impact of relative uncertainty and prevent excessive spillovers from other markets. Fostering a risk-neutral mindset and effectively leveraging uncertainty is crucial for forming stable market expectations for exchange rates.

Unraveling the causal relationship between inflation uncertainty and rates of inflation in GCC countries: Evidence from a mixture of causal (linear) relationships models, and (causal inference with panel data)

This study investigates the links between rising inflationary pressures and monetary policy uncertainty (Inflation Uncertainty) in the GCC economies. After discovering cross-sectional dependency among the countries as an index of their reciprocal developmental traits, we used the bootstrap panel Granger causality approach. Individual nation research reveals that only KSA has a bidirectional correlation between high global inflation rate pressures and economic policy uncertainty, whereas Bahrain has no causality. The United Arab Emirates and Qatar exhibit bidirectional causality between high global inflation rate pressures and domestic economic policy uncertainties. Domestic economic policy uncertainty has no bearing on KSA's high global inflation rate pressures; thus, there is a one-way causality from high global inflation rate pressures to domestic economic policy uncertainty in KSA. Overall, economic policy uncertainty influences high global inflation rate pressures in these nations, while high global inflation rate pressures and domestic economic policy uncertainty mutually impact each other. Overall, the GCC countries would benefit from an augmented Taylor rule that includes financial stability as an extra monetary policy aim. It is necessary to make a more general adjustment in the model dynamics underlying the shock transmission mechanism. JEL Classification Code: ECM, PNARDL, PVAR, Eviews12, ARDL, NCSS12

The interplay between economic policy uncertainty and corporate bond yield in emerging Asian markets

PurposeTo investigate the role of domestic and foreign economic policy uncertainty (EPU) in driving the corporate bond yields in emerging markets.Design/methodology/approachThe study utilizes monthly data from January 2008 to June 2023 from the selected emerging economies. The data analysis is conducted using univariate, bivariate and multivariate statistical techniques. The study includes bond market liquidity and global volatility (VIX) as control variables.FindingsDomestic EPU has a significant role in driving corporate bond yields in these markets. The study finds weak evidence to support the role of the USA EPU in influencing corporate bond yields in emerging economies. Domestic EPU holds more weight and influence than the EPU originating from the United States of America.Research limitations/implicationsThe findings provide useful insights to policymakers about the potential impact of policy uncertainty on corporate bond yields and enable them to make informed decisions regarding economic policies that maintains financial stability. Understanding the relationship between EPU and corporate bond yields enables investors to optimize their investment decisions in emerging market economies, opens the scope for further research on the interaction between EPU and volatility and other attributes of fixed income markets.Originality/valueFocuses specifically on the emerging market economies in Asia, providing an in-depth analysis of the dynamics and challenges faced by these countries, Explores the influence of both domestic and the USA EPU on corporate bond yields in emerging markets, offering valuable insights into the transmission channels and impact of EPU from various sources.

Does Economic Policy Uncertainty Explain Exchange Rate Movements in the Economic Community of West African States (ECOWAS): A Panel ARDL Approach

Research proposes that economic policy uncertainty (EPU) leads to exchange rate fluctuations. Given that African countries experience higher levels of uncertainty in developed/emerging markets, we examine the extent to which domestic and foreign EPU affect exchange rates for a panel of 12 ECOWAS countries covering the period 1996–2018. In order to account for non-stationarity, cross-sectional dependence, and heterogeneity, the paper employs the dynamic heterogeneous panel approach. The ECOWAS has a dual currency arrangement ranging from a common currency union (CFA) to floating exchange rates (Non-CFA). To account for this, this study splits the sample data into CFA and Non-CFA areas. In addition, this study considers the role of the global financial crisis in the exchange rate-EPU nexus. Our results show that domestic EPU has a positive effect on exchange rates in the long run for Non-CFA areas. Different from the existing literature, our results suggest that domestic EPU does not explain exchange rate fluctuations in the short run. For all countries, foreign EPU leads to appreciation in the long run and depreciation in the short run. Interestingly, foreign EPU has a more dominant effect on exchange rate fluctuations in the selected countries than domestic EPU. This may reflect the weak institutional framework in these countries, which allows external fluctuations to have a greater impact. Moreover, this could be attributed to the increase in foreign capital flows during the sample period. Thus, these countries must develop effective policies to effectively absorb these external shocks. Results are robust to different proxies of EPU.

경제정책 불확실성이 장단기 국채 수익률에 미치는 영향 분석

This study analyzes the impact of Korean and foreign economic policy uncertainty on Korean short-term and long-term government bond yield. First of all, the effect of domestic economic policy uncertainty on short-term and long-term government bond yields was analyzed, and then relative policy uncertainty, which was constructed as a ratio of Korean economic policy uncertainty to foreign economic policy uncertainty, was used. Japan, China, and the United States were considered for foreign economic policy uncertainty. In addition, through principal component analysis, Korea's economic policy uncertainty was divided into Korea-specific factors and common factors with Japan, China and USA. The analysis results are as follows. First, Korea's economic policy uncertainty did not have a significant effect on long-term and short-term government bond yields. Second, Korea's unique factor in economic policy uncertainty was found to significantly increase short-term government bond yields. Third, the economic policy uncertainties of Japan, China, and the US have been shown to increase Korea's short-term government bond yields. Fourth, in case of analyzing the effect of relative economic policy uncertainty, Korea's short-term government bond yield rises when Korea's economic policy uncertainty is relatively greater than China's. This implies that the impact of uncertainty on government bond yields can be clearly understood only when economic policy uncertainty is distinguished as a country-specific factor and a common factor.

Time-varying causality impact of economic policy uncertainty on stock market returns: Global evidence from developed and emerging countries

In this study, we examine the causal relationship between economic policy uncertainty (EPU) and stock indices in the Group of Seven and Emerging Market Seven nations from 1997 to 2022, using a novel time-varying Granger causality test based on the lag-augmented vector autoregressive model. The main findings are as follows. First, the results of the linear and non-linear Granger tests for the whole sample period show that either the global or national EPU has a causal impact on the stock market in less than half of the 14 countries, while the stock market is more likely to affect EPU. Second, the time-varying Granger causality tests show that the period in which the EPU affects the stock market is often accompanied by a major international crisis or national event. Global EPU has a relatively significant impact on developed market equity markets compared to domestic EPU. Resource-exporting emerging nations tend to be significantly affected by global EPU, but developing countries with complete industrial systems or unstable political situations are more likely to be affected by local EPU. Finally, multi-scale, time-varying Granger causality tests show that both global and domestic EPUs have a significant causal impact on equity markets in the long run, although the impact of global EPUs is concentrated in the short term, whereas the impact of domestic EPUs appears to be longer-term. The new coronavirus (COVID-19) has dramatically amplified the short-term impact of global EPU. Our findings support political implications for the development of government policies and investors' global asset allocation.

Capital investments and firm characteristics: The moderating role of economic policy uncertainty in the hospitality sector

The study explores the association between capital investments (CI), Economic Policy Uncertainty (EPU) and firm characteristics for 420 hospitality firms in India. Utilising the dynamic panel data approach, it addresses two main questions: How are current and past investments in CI influenced by current and past global and domestic EPU after controlling for different firm characteristics? Secondly, it considers the moderating effect of EPU and liquidity on CI in sampled firms. The findings of the study demonstrate that past domestic EPU, liquidity, profitability, sales growth and leverage positively impact CI. Whereas current global EPU, current domestic EPU, past global EPU, age and size negatively affect CI. For moderating effect of EPU and liquidity, it was noted that negative impact of EPU on CI was less pronounced for firms displaying greater liquidity. Overall, the study finds evidence of global EPU being more persistent and having a long-term negative effect on CI. The findings would be of significant use to policymakers and the hospitality industry. The policymakers may focus on improving liquidity during policy uncertainty to boost CI.

Determining Hotel Room Rates: Domestic Economic Policy Uncertainty and Crises

Although the impacts of economic policy uncertainty (EPU) on different aspects of the hospitality industry have been studied, none analyzes the effects of EPU on the hotel room rates. To close this gap, using the monthly data from January 2008 to November 2019, this article investigates the influences of Singapore's EPU (hereafter domestic EPU) on the hotel room rates of two types of hotels, luxury and economy, in Singapore with cointegration technique and error correction model. Although prior research findings suggest that economic and disease crises, and EPU, have negative effects on the dependent variable of interest, the results of this study do not always support this. The findings of this study show domestic EPU has a negative impact on the room rates of economy hotels, but no impact on the room rates of luxury hotels, and Global Financial Crisis has a negative effect on the room rates of luxury hotels, but no effect on the room rate of economy hotels. To avoid the omission of important independent variables, domestic economic condition and inbound tourism are included as other independent variables.

Domestic and international effects of economic policy uncertainty on corporate investment and strategic cash holdings: Evidence from Japan

We empirically examine the effects of economic policy uncertainty (EPU) of which measurement methodology Baker, Bloom & Davis (2016) propose on the investment and cash holding behaviors of Japanese firms. We also examine spillover effects of EPU of the United States on them. We find that Japanese firms invest less and accumulate more cash when domestic EPU increases. Impacts of subcategories of domestic EPU differs: the uncertainty of fiscal and exchange rate policies are the key drivers of the negative impacts on corporate investment although the predictive power for investment of economic policy uncertainty of exchange rate holds only in the short run. As for the international spillover, we find that economic policy uncertainty in the United States has negative spillover (contagion) effects on corporate investment in Japan. Our findings suggest that Japanese managers become more cautious in making investment decisions as a response not only to higher domestic EPU but also US EPU.

Global and domestic economic policy uncertainties and tourism stock market: Evidence from China

This study investigates the impacts of global economic policy uncertainty (GEPU) and domestic (Chinese) economic policy uncertainty (CEPU) on the long-run volatility of the tourism stock market in China based on an improved GARCH–MIDAS–X model. Empirical results reveal that both CEPU and GEPU have significant negative effects on the long-run volatility of China’s tourism stock market. It is further identified that the impact of GEPU on tourism companies’ performance is short-lived. The findings suggest that tourism-related practitioners should monitor both CEPU and GEPU when conducting risk assessments related to tourism investment and policymaking.

Impact of economic policy uncertainty on the volatility of China's emission trading scheme pilots

This paper aims to investigate the impact of the economic policy uncertainty (EPU) on the volatility of China's emission trading scheme (ETS) pilots. Based on the GARCH-MIDAS model, we proxy EPU using two domestic EPU indices and two global EPU indices and explore their impacts on the volatility of three representative ETSs, Hubei, Guangdong, and Beijing ETS pilots in China from 2014 to 2020. Our findings are threefold. Firstly, the effects on the volatility differ significantly across the ETS pilots and EPU indices. When the weighted value of the growth rate of EPU increases by 0.01 unit, the long-term volatility of Hubei and Beijing ETSs rises by 9.371%–28.777% and 1.629%–5.444%, respectively. For Guangdong, the volatility increases by 11.926%–22.713% when the domestic EPU rises and decreases by 38.302%–59.063% when the global EPU rises. Secondly, economic policy events affect the volatility of ETS pilots by adjusting industries' production, and such influence is alleviated by stabilization mechanisms of the carbon market. Finally, the GARCH-MIDAS model incorporating EPU indices has superior out-of-sample prediction ability in the Hubei and Beijing ETS. This study provides important policy implications for government to stabilize the volatility of ETS and a reliable method for investors to construct portfolios.

The asymmetric impact of economic policy uncertainty on global retail energy markets: Are the markets responding to the fear of the unknown?

Following the paucity of empirical studies on the effects of economic policy uncertainty (EPU) on global retail energy markets and the need to reassess the markets for the prevalence of rockets and feathers effect and rent-seeking behavior by retailers during the Covid-19 pandemic, we studied the asymmetric response of the markets to changes in EPU and crude oil costs. We estimated nonlinear autoregressive distributed lag models over the period 2004 M11-2020 M6 using data for global and domestic EPUs as well as gasoline, automotive diesel, domestic heating oil, industrial fuel oil and crude oil markets. We find that rising uncertainty significantly increases retail energy prices both in the short-run and long-run, especially in UK, Japan and Europe. The asymmetric patterns show that many of the markets respond more to rising uncertainty than declining uncertainty, suggesting the prevalence of the “fear of the unknown”. Our results also showed significant evidence of rockets and feathers effect in all the countries, except Canada. Furthermore, the likelihood of rent-seeking by retailers was observed in the diesel and domestic heating oil markets in Italy, UK, and France. The study concluded that these findings have important policy implications, particularly as they relate to consumer welfare, antitrust policies and stability of the policy environment.

Causality between Stock Market, Domestic and Global Economic Policy Uncertainty: Evidence from India

The aim of this article is to examine the relationship between the Indian stock market and the domestic and global economic policy uncertainty (EPU) during the period: January 2003–June 2020. The study employed unit root tests, Johansen cointegration test, vector error correction model (VECM), Granger causality test and impulse response function (IRF) for the analysis. This study finds the evidence for the presence of long-run equilibrium relationship between the stock market, domestic economic policy uncertainty (DEPU) and global economic policy uncertainty (GEPU) in India. The findings suggest that there is bidirectional causality between DEPU and stock market; however, no causality is found between GEPU and stock market in either direction. Also, it is found that there is bidirectional causality between DEPU and GEPU. The findings of the study may help policymakers to formulate decisive monetary and fiscal policies to achieve financial stability and are important for the financial investors and hedgers for portfolio allocations in India. JEL Codes: C32, D80, G12

Spillover effects of economic policy uncertainty on adult and youth unemployment

Abstract The paper studies the effects of foreign (the US, the UK and the Chinese) and domestic economic policy uncertainty (EPU) shocks on unemployment in Germany, France, Italy and Spain. The analysis is run separately for the rates of adult and youth unemployment. Impulse responses derived from vector autoregressive models show that the magnitudes of the responses of the adult and youth segments of the labour market are quite different. Following an uncertainty shock, the youth unemployment rate increases significantly more than the adult unemployment rate. This is the case for France, Italy and Spain. The German labour market seems to be resistant to foreign (except Chinese) and domestic EPU shocks, while the remaining labour markets, foremost the Spanish and Italian ones, are susceptible to uncertainty shocks, especially to the US EPU shocks.

Economic Policy Uncertainty, COVID-19, and Tourist Stays in Croatia: Evidence from a Fourier Toda-Yamamoto Modeling Approach

ABSTRACT This study extends the literature with respect to economic policy uncertainty measures and tourism flows to Croatia through the use of the Toda and Yamamoto modeling approach with a Fourier approximation to capture structural breaks. The results show that domestic economic policy uncertainty does not have a significant impact on tourist overnight stays. However, an increase in European economic policy uncertainty reduces total and domestic tourist overnight stays. An increase in COVID-19 cases has a negative and significant impact on total, domestic, and foreign tourist overnight stays, and contributes to increases in both Croatian and European economic policy uncertainty.

International portfolio investment: does the uncertainty matter?

PurposeThis study investigates the effect of global and domestic uncertainty on the dynamics of portfolio investment in 21 economies (mostly advanced and larger emerging economies) from 2001–2016.Design/methodology/approachSpecifically, the evolution of the net portfolio equity investment inflows (FPI net inflows) and the evolution of net portfolio investment (FPI net) are investigated in a context in which the degree and the volatility of domestic economic policy uncertainty (EPU) and world uncertainty index (WUI) varied. The authors provide an empirical analysis through the sequential (two-stage) estimation of linear panel data models for unbalanced panel data.FindingsAn increase in the degree and volatility of domestic EPU has a significant negative influence on FPI net inflows, while an increase in WUI has a significant positive one. Notably, a simultaneous increase in the domestic EPU and WUI enhances the net inflows of FPI, whereas a simultaneous increase in the volatility of these indicators reduces the net inflows of FPI. An increase in the degree and volatility of both domestic EPU and WUI have a significant positive effect on the net portfolio investment, implying that a significant net portfolio investment is going out of the country.Research limitations/implicationsThe results of this study encourage international investors to consider uncertainty indicators (and, more specifically, their variations) in their portfolio strategy to optimize their position on the international markets. The findings of this study invite policy-makers from large countries to reduce the perceived domestic uncertainty since this parameter can influence international investors' sensitivity and willingness to diversify their position out of the country.Originality/valueThe authors' approach focuses on the variations of uncertainty (existing literature mainly works with the indicators). While the results confirm the role played by large markets in international portfolio investment management, it nuances the changes in the portfolio management behaviors toward other markets when facing a changing uncertainty.