×
Funashima, Yoshito

How does economic policy uncertainty respond to permanent and transitory shocks? (English) Zbl 07820438

Bull. Econ. Res. 76, No. 1, 267-282 (2024).
Summary: The widely used economic policy uncertainty index relies on newspaper reports’ word count and may be influenced by media coverage biases. This empirical study explores the response of the economic policy uncertainty index to permanent and transitory shocks, which are identified using a structural vector autoregressive model. We find an overreaction in the economic policy uncertainty index to a permanent shock, suggesting media reporting’s temporary overeagerness. Specifically, we demonstrate that the index responds negatively and transiently to a permanent shock, followed by reversed, prolonged responses. However, the negative and transient effects of a transitory shock on the index are milder.
© 2023 Board of Trustees of the Bulletin of Economic Research and John Wiley & Sons Ltd.

MSC:

91-XX Game theory, economics, finance, and other social and behavioral sciences

Keywords:

economic policy uncertainty index; media; overreaction; permanent shocks; transitory shocks; structural vector autoregressive analysis
Cite Review PDF
Full Text: DOI

References:

[1] Alesina, A., Mirrlees, J., & Neumann, M. J. M. (1989). Politics and business cycles in industrial democracies. Economic Policy, 4(8), 55-98.
[2] Alessandri, P., & Mumtaz, H. (2019). Financial regimes and uncertainty shocks. Journal of Monetary Economics, 101, 31-46.
[3] Baker, S. R., Bloom, N., Canes‐Wrone, B., Davis, S. J., & Rodden, J. (2014). Why has US policy uncertainty risen since 1960?American Economic Review, 104(5), 56-60.
[4] Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. Quarterly Journal of Economics, 131(4), 1593-1636.
[5] Bartsch, Z. (2019). Economic policy uncertainty and dollar‐pound exchange rate return volatility. Journal of International Money and Finance, 98, 102067.
[6] Blanchard, O. J., & Quah, D. (1989). The dynamic effects of aggregate demand and supply disturbances. American Economic Review, 79(4), 655-673.
[7] Bloom, N. (2009). The impact of uncertainty shocks. Econometrica, 77, 623-685. · Zbl 1176.91114
[8] Bloom, N. (2014). Fluctuations in uncertainty. Journal of Economic Perspectives, 28(2), 153-176.
[9] Caglayan, M., & Xu, B. (2019). Economic policy uncertainty effects on credit and stability of financial institutions. Bulletin of Economic Research, 71(3), 342-347.
[10] Carriero, A., Mumtaz, H., Theodoridis, K., & Theophilopoulou, A. (2015). The impact of uncertainty shocks under measurement error: A proxy SVAR approach. Journal of Money, Credit and Banking, 47(6), 1223-1238.
[11] Carroll, C. D. (1992). The buffer‐stock theory of saving: Some macroeconomic evidence. Brookings Papers on Economic Activity, 2, 61-135.
[12] Carroll, C. D. (1997). Buffer‐stock saving and the life cycle/permanent income hypothesis. Quarterly Journal of Economics, 112, 1-55. · Zbl 0882.90023
[13] Carroll, C. D., & Samwick, A. A. (1998). How important is precautionary saving?Review of Economics and Statistics, 80(3), 410-419.
[14] Cesa‐Bianchi, A., & Fernandez‐Corugedo, E. (2018). Uncertainty, financial frictions, and nominal rigidities: A quantitative investigation. Journal of Money, Credit, and Banking, 50(4), 603-636.
[15] Cochrane, J. H. (1994). Permanent and transitory components of GNP and stock prices. Quarterly Journal of Economics, 109(1), 241-265.
[16] Colombo, V. (2013). Economic policy uncertainty in the US: Does it matter for the Euro area?Economics Letters, 121, 39-42.
[17] Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74, 427-431. · Zbl 0413.62075
[18] Duca, J. V., & Saving, J. L. (2017). Income inequality, media fragmentation, and increased political polarization. Contemporary Economic Policy, 35(2), 392-413.
[19] Duca, J. V., & Saving, J. L. (2018). What drives economic policy uncertainty in the long and short runs: European and U.S. evidence over several decades. Journal of Macroeconomics, 55, 128-145.
[20] Elliott, G., Rothenberg, T. J., & Stock, J. H. (1996). Efficient tests for an autoregressive unit root. Econometrica, 64, 813-836. · Zbl 0888.62088
[21] Friedman, M. (1957). A theory of the consumption function. Princeton University Press.
[22] Frank, M. Z., & Sanati, A. (2018). How does the stock market absorb shocks?Journal of Financial Economics, 129(1), 136-153.
[23] Funashima, Y. (2022a). Effects of unanticipated monetary policy shocks on monetary policy uncertainty. Finance Research Letters, 46(A), 102326.
[24] Funashima, Y. (2022b). Economic policy uncertainty and unconventional monetary policy. Manchester School, 90(3), 278-292.
[25] Gospodinov, N., Herrera, A. M., & Pesavento, E. (2013). Unit roots, cointegration and pretesting in VAR models. Advances in Econometrics, 31, 81-115. · Zbl 1443.62227
[26] Hall, R. E. (1978). Stochastic implications of the life cycle‐permanent income hypothesis: Theory and evidence. Journal of Political Economy, 96, 971-987.
[27] Johansen, S. (1988). Statistical analysis of cointegrating vectors. Journal of Economic Dynamics and Control, 12, 213-254. · Zbl 0647.62102
[28] Johansen, S., & Juselius, K. (1990). Maximum likelihood estimation and inference on cointegration: With application to the demand for money. Oxford Bulletin of Economics and Statistics, 52, 169-210.
[29] Kilian, L., & Lütkepohl, H. (2017). Structural vector autoregressive analysis, Cambridge University Press. · Zbl 1377.62005
[30] Kim, W. (2019). Government spending policy uncertainty and economic activity: US time series evidence. Journal of Macroeconomics, 61, 103124.
[31] Kimball, M. S. (1990). Precautionary saving in the small and in the large. Econometrica, 58, 53-73.
[32] Nilavongse, R., Rubaszek, M., & Uddin, G. S. (2020). Economic policy uncertainty shocks, economic activity, and exchange rate adjustments. Economics Letters, 186, 108765.
[33] Nodari, G. (2014). Financial regulation policy uncertainty and credit spreads in the US. Journal of Macroeconomics, 41, 122-132.
[34] Stockhammar, P., & Österholm, P. (2016). Effects of US policy uncertainty on Swedish GDP growth. Empirical Economics, 50, 443-462.
[35] Zhang, D., Lei, L., Ji, Q., & Kutan, A. M. (2019). Economic policy uncertainty in the US and China and their impact on global markets. Economic Modelling, 79, 47-56.
This reference list is based on information provided by the publisher or from digital mathematics libraries. Its items are heuristically matched to zbMATH identifiers and may contain data conversion errors. In some cases that data have been complemented/enhanced by data from zbMATH Open. This attempts to reflect the references listed in the original paper as accurately as possible without claiming completeness or a perfect matching.