Economic Policy Uncertainty and Macroeconomic Activity: An Asymmetric Approach

Abstract

In the new global economy, uncertainty has become a critical determinant of financial and economic stability. This thesis aims to study the impact of uncertainty on a set of macroeconomic variables such as demand for money, investment, and consumption. Different measures of uncertainty are used by scholars in the investigation of money demand, investment, and consumption like monetary and output uncertainty. This study employs a more general and inclusive measure of uncertainty, policy uncertainty, which measures uncertainty in fiscal, regulatory and monetary policies. By implementing a Nonlinear Autoregressive Distributed Lag (ARDL) model, I aim to identify possible non-linear effects of uncertainty on economic variables, which help us to have a better understanding of its role in each of the G7 economies. The advantage of choosing this methodology is that it allows researchers to explain both long-run relationships and short-run dynamics of money demand, investment, and consumption. The empirical results exhibit that policy uncertainty has asymmetric effects on the macroeconomic variables in all G7 economies. These asymmetric reactions of the macroeconomic variables to fluctuations in policy uncertainty imply positive and negative shocks in economic policy uncertainty could not offset the effects of each other, and they have persistent impacts on demand for money, investment and consumption in the long-run.