Economic Policy Uncertainty Shocks Research Articles

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.

Impacts of economic policy uncertainty on the time-varying risk–return relationship: evidence from G7 countries

ABSTRACT This paper examines the impact of country-specific and global economic policy uncertainty (EPU) on the time-varying risk – return relationship in G7 stock markets and explores whether this impact is significantly different during the 2008 Global Financial Crisis (GFC). Empirical results suggest that the risk – return trade-off varies with many factors. More importantly, we find that both the national and global EPU shocks have significant and negative impacts on the time-varying risk – return relationship in all G7 countries, and these negative impacts increase and intensify during the GFC.

The macroeconomic effect of COVID-induced economic policy uncertainty in Nigeria: a DSGE approach

PurposeThis study examined the macroeconomic effects of COVID-19-induced economic policy uncertainty (EPU) in Nigeria. The study considered the effects of three related shocks: EPU, COVID-19 and correlated economic policy uncertainty and COVID-19 shock.Design/methodology/approachFirst, the study presented VAR evidence that fiscal and monetary policy uncertainty depresses real output. Thereafter, a nonlinear DSGE model with second-moment fiscal and monetary policy shocks was solved using the third-order Taylor approximation method.FindingsThe authors found that EPU shock is negligible and expansionary. By contrast, COVID-19 shocks have strong contractionary effects on the economy. The combined shocks capturing the COVID-19-induced EPU shock were ultimately recessionary after an initial expansionary effect. The implication is that the COVID-19 pandemic-induced EPU adversely impacted macroeconomic outcomes in Nigeria in a non-trivial manner.Practical implicationsThe result shows the importance of policies to cushion the effect of uncertain fiscal and monetary policy path in the aftermath of COVID-19.Originality/valueThe originality of the paper lies in examining the impact of COVID-19 induced EPU in the context of a developing economy using the DSGE methodology.

The influence of economic policy uncertainty shocks on art market

ABSTRACT We contribute to the literature by studying the impact of economic policy uncertainty shocks on returns in the global art market, the global paintings market and the U.S.A art market from 1998:Q1 to 2018:Q3. Based on the frequency domain Granger causality test and continuous wavelets analysis, the results show that an increase in policy uncertainty shocks significantly reduces returns on art and paintings and that the effect is stronger during extreme volatility periods. Policy implications are derived at the end of the article.

How are economic policy uncertainty shocks transmitted to capital structure? Chinese evidence

PurposeThe purpose of this paper is to investigate the mechanism of transmitting economic policy uncertainty (EPU) shocks to capital structure.Design/methodology/approachThe authors adopt a novel approach that bridges the asset pricing implications of EPU and the debt-financing decisions of Chinese firms by introducing a variable “policy-risk-induced equity return” (PRER). PRER is the product of the EPU beta and the EPU shock. Differentiating firms as per the signs of the EPU beta helps to shed light on the deep questions of whether their respective leverage targets and speeds of adjustment are different and how the targets and speeds are determined.FindingsThe empirical evidence shows that it is the equity market that channels EPU shocks to capital structure through PRER in China. Firms with positive (negative) EPU betas have PRER impact negatively (positively) the leverage target, conforming to the market-timing theory. EPU and non-policy uncertainty shocks cause the speed of adjustment to change over time. Overall, the intertemporal relation between EPU and leverage is negative. These results are robust to alternative leverage measures and after controlling for non-policy uncertainty shocks and conventional firm characteristics and have implications for academic research, policymaking, market stability, and corporate financing.Originality/valueThis study is the first to probe for, and provide insights into, the underlying reason why EPU impacts capital structure by connecting asset pricing to corporate financing for a large sample of Chinese publicly traded firms.

Economic Policy Uncertainty, Industrial Intelligence, and Firms’ Labour Productivity: Empirical Evidence from China

ABSTRACT In this paper, we empirically explore the impact of uncertainty in economic policy and industrial intelligence on firms’ labor productivity, as well as the possible methods and mechanisms of influence. After theoretical inference, we employ regression models with sample data collected from A-share companies in the manufacturing industry listed on the Shanghai and Shenzhen stock exchanges between 2007 and 2019. We find that firms’ labor productivity experiences a significant decrease under economic policy uncertainty. However, the negative effect of economic policy uncertainty shocks on labor productivity in regions with high industrial intelligence levels is effectively mitigated. These differential changes in the impact of economic policy uncertainty shock on labor productivity between areas with high and low industrial intelligence levels are found primarily for firms in high-technology and highly specialized sectors, sectors with strong financial constraints. Besides, we perform further analysis which indicates that the upgrading of human capital operates as an essential channel for economic policy uncertainty shocks and industrial intelligence to affect firms’ labor productivity. Overall, our findings illustrate that implementing economic policies in a stable and transparent way and developing intelligent technology can improve firms’ labor productivity.

International Fund Allocation under Economic Policy Uncertainty Shock

Abstract This paper focuses on the impact of economic policy uncertainty on international asset allocation and international capital flows. Our results show that economic policy uncertainty shocks have a negative impact on the international asset allocation, which can be explained from the real economic activity channel and the expectation channel. We also explore a full fledge of country level heterogeneities about the economic policy uncertainty shocks on international asset allocation. Specifically, good institutional quality, transparent information, good information access to the international financial market and bilateral informational link help to alleviate the negative effect that economic policy uncertainty shock does to asset allocation. And a healthy public and external sector also help to alleviate the negative effect. While the importance of government in the economy amplifies the negative effect of economic policy uncertainty shocks to asset allocation. JEL classification numbers: E44, G11, G15. Keywords: Economic policy uncertainty, Global fund allocation, Institutional quality, Global imbalance.

Economic Policy Uncertainty, Social Financing Scale and Local Fiscal Sustainability: Evidence from Local Governments in China

The motivation for this paper is to investigate a previously unexplored exogenous shock to fiscal sustainability from economic policy uncertainty. To control for the impact of local government institutional and cultural factors on fiscal sustainability, we select data from 30 Chinese provinces for the 2012–2020 period for empirical analysis. We find that economic policy uncertainty shocks have a robust negative effect on fiscal sustainability after controlling for endogeneity. Economic policy uncertainty has an impact on fiscal sustainability mainly through the mediating variable of the social financing scale. To cope with the impact of uncertain economic policies, corporations reduce the scale of investment and financing, and residents have defensive savings motivations, reducing consumption and increasing savings. Therefore, economic policy uncertainty can lead to a reduction in the social financing scale. A reduction in the social financing scale can reduce government revenue and increase the debt scale. Ultimately, this leads to a decrease in the fiscal sustainability of local governments. This paper can provide a theoretical reference for reducing the negative impact of government policy adjustments and improving fiscal sustainability.

Of votes and viruses: the UK economy and economic policy uncertainty

ABSTRACT This paper examines the relation between GDP growth, Divisia money growth, CPI inflation, financial stress, and the UK's economic policy uncertainty in the context of its departure from the European Union. We employ two Bayesian VAR models which account for the extreme observations in macroeconomic and financial time series resulting from the COVID-19 pandemic outbreak. We document a contractionary effect of an economic policy uncertainty shock on GDP growth, which is not present in a model which does not account for the COVID-19-related outliers. Additionally, we find that GDP growth is enhanced by Divisia monetary stimulus but hampered by increases in financial stress. The results from a stochastic volatility in the mean threshold model also uncover different dynamics of transmission of shocks between economic uncertainty and the indicators we study across high and low economic policy uncertainty regimes.

Time-varying characteristics of the simultaneous interactions between economic uncertainty, international oil prices and GDP: A novel approach for Germany

This study is the first attempt to analyze the simultaneous time-varying interactions among international oil prices, economic policy uncertainty (EPU) and output for the German economy. Contrary to similar results in the literature, this study reports strikingly interesting findings. First, the responses of the German GDP to both uncertainty and international oil price shocks are time-varying, and these responses are significantly affected by the major historical events such as the Global Financial Crisis and the oil price collapse of 2014. Second, oil price shocks trigger negative responses of EPU, but these responses turn to positive in periods such as the Iraq invasion, the GFC of 2008–2009, and the oil price collapse of 2014. Third, while the responses of the German GDP to EPU shocks are affected by the prevailing economic and political conditions, the responses of EPU to GDP shocks are consistently negative. Finally, the overall responses of international oil prices to the German EPU shocks are negative in the short-term, while these responses in the medium- and long-term are insignificant.

Economic Policy Uncertainty and International Tourism Demand: A Global Vector Autoregressive Approach

In a globalized environment, a major shock or event can reverberate across tourism interdependent countries over time. This paper aims to empirically examine how economic policy uncertainty (EPU) emanating from a large country may influence inbound and outbound tourism in other countries. Using Global Vector Autoregressive (GVAR) model and two alternative measures of EPU, the study finds the modeled effects of EPU are dependent on the source of EPU measures, level of internationalization, and type of trade-weights used. Notably, the results show the “decline-rebound-overshoot” effect of EPU shock on tourism demand, and capture the link between capital flight and outbound travel from China in times of surge in EPU. This research highlights that GVAR is able to capture previously unobserved empirical insights because assessing the international impact of shocks such as economic crises, pandemics, and political instability necessitates accounting for cross-sectional interdependence in tourism flows between many countries.

Economic policy uncertainty and industry innovation: Cross country evidence

We use the fixed effects identification strategy to examine the impact of economic policy uncertainty on innovation using cross-country industry data and how country institutions moderate this relationship. Our findings show that economic policy uncertainty impedes innovation across all five innovation proxy measures; patent counts, patenting entities, citations per patent, patent originality, and patent generality. Our study uncovers three economic mechanisms that potentially explain the negative relationship between economic policy uncertainty and technological innovation. We show that patent counts, patenting entities, patent citations, patent originality, and patent generality fall following high economic policy uncertainty episodes via the risk-tolerance, financial, and information channels. We also provide evidence that the adverse effects of economic policy uncertainty on innovation are moderate in countries with higher levels of transparency, more liberalized financial markets and higher property and patent rights protection. Our paper provides evidence on the real effects of economic policy uncertainty shocks on the economy.

Interdependence of economic policy uncertainty and business cycles in selected emerging market economies

PurposeThe purpose of this paper is to investigate the interdependence between economic policy uncertainty (EPU) and business cycles within and among six emerging market economies (EMEs) from January 1999 to December 2018.Design/methodology/approachThis study adopts the wavelet multiple correlations and wavelet multiple cross-correlation (WMCC) based on the maximal overlap discrete transform estimator. This methodology simultaneously investigates how two or more time series variables move together continuously at both time and frequency domains.FindingsThe empirical results show that business cycles comove with EPU for both intra- and inter-country analysis, with the long term showing the greatest degree of interdependence. In intra-country comparisons, EPU has a positive correlation with consumer price index and a negative correlation with share price index. According to the WMCC results, EPU does not have any leading or lagging power within each EME, but rather import has both lead and lag power. The inter-country WMCC results are all significant, with Korea’s EPU leading/following all EMEs across all scales.Originality/valueThis study contributes to the ongoing debate about what causes business cycles to comove by investigating business cycle indicators (leader/follower) using a robust wavelet methodology. The authors propose new variables that can clearly reflect the outcome of economic policy actions and translate information about EPU shocks. The inclusion of the variables has altered the understanding of the relationship between EPU and business cycle fluctuations. Policymakers also gain new insights into the trends and patterns of EPU and business cycles, which will help them formulate and implement fiscal and monetary policies more effectively.

Economic Policy Uncertainty Shocks and Chinese Stock Market Volatility: An Empirical Analysis with SVAR

This paper proposes a framework for examining the interaction between stock market volatilities and economic uncertainty shocks, aiming to understand better the influence of economic uncertainty shocks on the Chinese stock market. The major empirical results include the followings. First, the economic policy uncertainty shocks push the Chinese stock volatility up, increasing the market risk. A 1‐standard‐deviation shock of economic policy uncertainty will enhance the stock volatility of the two composite indices by approximately 7% in 12 months. Second, the stock volatility reacted more intensely to fiscal and monetary economic policy uncertainty shocks, with a 1‐standard‐deviation shock that can enhance the stock volatility of the two composite indices by more than 10% in 12 months. Third, different stock indices exhibit different patterns of cumulative impulse responses, and the reaction of the volatility of the SSE real estate index to economic policy uncertainty shocks is more significantly intense than other indices. Besides, we have proved the robustness of empirical results by reestimating the models with a lag order of 2. Overall, our research results can provide policy and managerial insights for the sustainable development of the Chinese stock market and beyond.

Commodity Price Uncertainty Comovement: Does it Matter for Global Economic Growth?

Global economic activity is surrounded by increasing uncertainties from various sources. In this paper, we focus on commodity prices and estimate a global commodity uncer- tainty factor by capturing comovement in volatilities of major agricultural, metals and energy commodity markets through a group-specific Dynamic Factor Model. Then, by computing impulse response functions estimated using a Structural VAR model, we find that an increase in the common commodity price uncertainty results in a substantial and persistent drop in investment and trade for a set of emerging and advanced economies. We show that a global commodity uncertainty shock is more detrimental for economic growth than usual financial and economic policy uncertainty shocks. Last, our method- ology turns out to be a way to disentangle the macroeconomic effects of good and bad oil uncertainty: when an oil uncertainty shock is common to all commodities, then the macroeconomic effect is likely to be negative, but when this shock is specific to the oil market, the effect tends to be positive in the short run.

Economic policy uncertainty and growth nexus in Pakistan: a new evidence using NARDL model

This study aims to test the symmetric and asymmetric impact of economic policy uncertainty (EPU) on economic growth for the time period 2011M1–2020M5 in Pakistan, using the linear and nonlinear autoregressive distributive lag (ARDL) approach. Unlike other studies, we aim to estimate the impact of uncertainty using the recently developed EPU index by Baker et al. (Q J Econ 131(4):1593–1636, 2016). The nonlinear (NARDL) model results show that positive EPU shocks have a negative impact on short-run economic growth, and the magnitude of positive shocks is greater than the magnitude of negative shocks. The reason is that Pakistan is facing issues like nondiversified sectors, price spikes, political uncertainty, and a weak economic and financial structure. Due to these factors, any adjustment in economic policies creates an unpredictable environment in the country. When uncertainty decreases, economic activity may rebound, but it does not happen instantly. On the basis of the findings of the study, we recommend that there should be political stability in the country and coordination between macroeconomic policies to achieve long-term goals. Moreover, policymakers must play their part in reducing levels of uncertainty by envisaging any future changes in the policy-regulatory environment and maintaining the flexibility to act quickly in the event of a major economic crisis.

Financial sector and economic growth amid external uncertainty shocks: Insights into emerging economies.

The study aims to shed new lights on the lead-lag relationships between the financial sector (RFSI) and economic growth (GDP) in the midst of global economic policy uncertainty (GEPU) shocks for BRICS economies. Hence, the bivariate, partial, and wavelet multiple correlations techniques are employed. From the bivariate analysis, we document positive bi-directional causality between the RFSI and economic growth over the sample period. The partial wavelet reveals that GEPU shocks distort the significance and directional comovements between the RFSI and GDP. Moreover, the outcome from the wavelet multiple cross correlations (WMCC) indicates that the RFSI is a first mover at most time scales for the BRICS economies. This is followed by GEPU which either leads or lags for most scales, especially for South Africa. The impact of GEPU on RFSI and GDP is worst for South Africa in about four cases in the medium-, and long-terms. This signifies that South Africa’s financial markets and economic growth are vulnerable to GEPU. However, the impetus for GEPU to drive the comovements between the financial sector and economic activity was less pronounced in the pre-COVID analysis conducted with the WMCC. The study supports both the supply-leading and demand-following hypotheses. Our findings also underscore the need for policymakers, investors and academics alike to incessantly observe the dynamics between finance and growth across time and periodicity while considering adverse shocks from global economic policy uncertainty in tandem.

Business confidence as a strong tracker of future growth: is it driven by economic policy uncertainty and oil price shocks in the OECD countries?

Business confidence matters for future growth as it relies on opinion surveys of developments in production activities, orders and stocks of finished products. Is it then affected by economic policy uncertainty and oil price asymmetries in the OECD countries? With limited evidence in the literature, we adopt the Augmented Mean Group (AMG) estimator following the evidence of cross-sectional dependence, non-stationarity and cointegration in the panel series. The full sample results show that business confidence is negatively affected by economic policy uncertainty and oil price. Moreover, the role of asymmetries cannot be neglected as both positive and negative oil price changes show different impacts on business confidence. The sub-sample results further reveal that the impacts of economic policy uncertainty and oil price on business confidence are higher in the Eurozone countries than in their non-Eurozone counterparts. We believe this is due to the central economic coordination and higher net-oil dependence and import status of the Eurozone countries.

Symmetric and asymmetric impact of economic policy uncertainty on food prices in China: A new evidence

The study explores the symmetric and asymmetric impact of economic policy uncertainty (EPU) on food prices in China for the period from 1998M1 to 2020M5. The linear Autoregressive Distributive Lag (ARDL) framework is used to evaluate the symmetric effect. However, the nonlinear Autoregressive Distributive Lag (NARDL) model is employed to gauge the asymmetric impact of the EPU on food prices in the short run and in the long run. According to ARDL results, an increase in EPU leads to a significant increase in food prices both in the long run and in the short run. In NARDL short run results, the Wald test statistic confirms the presence of asymmetry. It is found that negative EPU shocks have a positive and significant effect on food prices, while positive shocks have a negative but insignificant impact. In the long run, the Wald test for asymmetry shows that there is no evidence of asymmetry. Also, the impact of positive and negative EPU shocks is insignificant. The dynamic multiplier graph for NARDL shows the adjustment of asymmetry after negative and positive shocks towards long-run equilibrium. The overall impression is that negative shocks of uncertainty have a deeper effect than positive shocks on food prices in China. The overall analysis shows that EPU shocks have an asymmetric impact as they are sudden, unforeseen and disrupt food price stability in the short-run only. Yet it will shift towards equilibrium again in the long-run.

Economic policy uncertainty and stock market returns: Evidence from Canada

We contribute to the literature on economic policy uncertainty (EPU) and asset prices by studying the impact that EPU has on the behavior of the stock market in Canada over the period 1985–2015. Even though a previous study has assessed the impact of policy uncertainties on stock returns in Canada, no research has explained its country-specific associated implications about policy and market behavior in short-run and long-run. Our results indicate that the EPU exhibits significant negative impacts on Canadian stock market returns in both OLS and ARDL estimations. When we look at the possibilities of asymmetric effects of EPU shocks through nonlinear adjustment of the policy uncertainty measure, we find both short-run and long-run impacts are asymmetric. In the long-run, increased policy uncertainty persuades investors to take a ‘risk-off’ approach to gravitate toward lower-risk investments, which tends to decrease asset prices, whereas, decreased uncertainty prompts investors to take on portfolio risk for the chance of higher returns. Over the long-run, higher inflation can have a dampening effect on investment returns and real savings. The Bank of Canada should always demonstrate its accountability through forward looking monetary policy actions to maintain the value of assets in the long-run. Our main conclusions are based on various robustness checks.