Economic policy uncertainty in the US: Does it matter for the Euro area?
TL;DR: In this paper, the authors investigate the effects of a US economic policy uncertainty shock on some Euro area macroeconomic aggregates via Structural VARs and show that the contribution of the US uncertainty shock to the European aggregates is quantitatively larger than the one exerted by an Euro area-specific uncertainty shock.
About: This article is published in Economics Letters.The article was published on 2013-10-01. It has received 391 citations till now. The article focuses on the topics: Shock (economics) & Business cycle.
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TL;DR: The authors developed a new index of economic policy uncertainty based on newspaper coverage frequency and found that policy uncertainty spikes near tight presidential elections, Gulf Wars I and II, the 9/11 attacks, the failure of Lehman Brothers, the 2011 debt ceiling dispute and other major battles over fiscal policy.
Abstract: We develop a new index of economic policy uncertainty (EPU) based on newspaper coverage frequency Several types of evidence – including human readings of 12,000 newspaper articles – indicate that our index proxies for movements in policy-related economic uncertainty Our US index spikes near tight presidential elections, Gulf Wars I and II, the 9/11 attacks, the failure of Lehman Brothers, the 2011 debt-ceiling dispute and other major battles over fiscal policy Using firm-level data, we find that policy uncertainty raises stock price volatility and reduces investment and employment in policy-sensitive sectors like defense, healthcare, and infrastructure construction At the macro level, policy uncertainty innovations foreshadow declines in investment, output, and employment in the United States and, in a panel VAR setting, for 12 major economies Extending our US index back to 1900, EPU rose dramatically in the 1930s (from late 1931) and has drifted upwards since the 1960s
4,484 citations
TL;DR: In this article, the effects of uncertainty shocks on unemployment dynamics were investigated by estimating non-linear smooth transition models with post-WWII US data, and the relevance of such uncertainty shocks was found to be much larger than that predicted by standard linear VARs in terms of magnitude of the reaction of the unemployment rate to such shocks, and contribution to the variance of the prediction errors of unemployment at business cycle frequencies.
362 citations
Additional excerpts
...2 (2013), Gilchrist, Sim, and Zakrajsek (2013), Leduc and Liu (2013), Colombo (2013), Mumtaz and Surico (2013), Nodari (2014)....
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TL;DR: In this article, the predictability of economic policy uncertainty (EPU) to stock market volatility was investigated and in-sample evidence suggests that higher EPU leads to significant increases in market volatility.
351 citations
TL;DR: This article used a kth-order nonparametric quantile causality test to analyse whether news-based economic policy uncertainty (EPU) and equity market uncertainty (EMU) predict stock returns and volatility.
Abstract: A recent strand in the literature emphasizes the role of news-based economic policy uncertainty (EPU) and equity market uncertainty (EMU) as drivers of oil price movements. Against this backdrop, this paper uses a kth-order nonparametric quantile causality test, to analyse whether EPU and EMU predict stock returns and volatility. Based on daily data covering the period of 2 January 1986 to 8 December 2014, we find that, for oil returns, EPU and EMU have strong predictive power over the entire distribution barring regions around the median, but for volatility, the predictability virtually covers the entire distribution, with some exceptions in the tails. In other words, predictability based on measures of uncertainty is asymmetric over the distribution of oil returns and its volatility.
243 citations
Cites background from "Economic policy uncertainty in the ..."
...Only until lately Bloom (2009), Colombo (2013) and Jones and Olson (2013) emphasized the role of economic policy uncertainty on real activity, which in turn affects oil-price fluctuations....
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TL;DR: This article examined the effect of economic policy uncertainty on cash holding decisions of firms in BRIC countries and found that firms prefer to hold more cash when uncertainty increases after controlling for firm level variables with industry and year fixed effects.
215 citations
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TL;DR: In this paper, a model with a time varying second moment is proposed to simulate a macro uncertainty shock, which produces a rapid drop and rebound in aggregate output and employment, which occurs because higher uncertainty causes firms to temporarily pause their investment and hiring.
Abstract: Uncertainty appears to jump up after major shocks like the Cuban Missile crisis, the assassination of JFK, the OPEC I oil-price shock and the 9/11 terrorist attack This paper offers a structural framework to analyze the impact of these uncertainty shocks I build a model with a time varying second moment, which is numerically solved and estimated using firm level data The parameterized model is then used to simulate a macro uncertainty shock, which produces a rapid drop and rebound in aggregate output and employment This occurs because higher uncertainty causes firms to temporarily pause their investment and hiring Productivity growth also falls because this pause in activity freezes reallocation across units In the medium term the increased volatility from the shock induces an overshoot in output, employment and productivity Thus, second moment shocks generate short sharp recessions and recoveries This simulated impact of an uncertainty shock is compared to VAR estimations on actual data, showing a good match in both magnitude and timing The paper also jointly estimates labor and capital convex and non-convex adjustment costs Ignoring capital adjustment costs is shown to lead to substantial bias while ignoring labor adjustment costs does not
3,405 citations
TL;DR: In this article, the authors consider estimation and hypothesis testing in linear time series models when some or all of the variables have unit roots and show that parameters that can be written as coefficients on mean zero, nonintegrated regressors have jointly normal asymptotic distributions, converging at the rate T'/2.
Abstract: This paper considers estimation and hypothesis testing in linear time series models when some or all of the variables have unit roots. Our motivating example is a vector autoregression with some unit roots in the companion matrix, which might include polynomials in time as regressors. In the general formulation, the variable might be integrated or cointegrated of arbitrary orders, and might have drifts as well. We show that parameters that can be written as coefficients on mean zero, nonintegrated regressors have jointly normal asymptotic distributions, converging at the rate T'/2. In general, the other coefficients (including the coefficients on polynomials in time) will have nonnormal asymptotic distributions. The results provide a formal characterization of which t or F tests-such as Granger causality tests-will be asymptotically valid, and which will have nonstandard limiting distributions.
2,529 citations
TL;DR: In this article, a model with a time-varying second moment is proposed to simulate a macro uncertainty shock, which produces a rapid drop and rebound in aggregate output and employment.
Abstract: Uncertainty appears to jump up after major shocks like the Cuban Missile crisis, the assassination of JFK, the OPEC I oil-price shock, and the 9/11 terrorist attacks. This paper offers a structural framework to analyze the impact of these uncertainty shocks. I build a model with a time-varying second moment, which is numerically solved and estimated using firm-level data. The parameterized model is then used to simulate a macro uncertainty shock, which produces a rapid drop and rebound in aggregate output and employment. This occurs because higher uncertainty causes firms to temporarily pause their investment and hiring. Productivity growth also falls because this pause in activity freezes reallocation across units. In the medium term the increased volatility from the shock induces an overshoot in output, employment, and productivity. Thus, uncertainty shocks generate short sharp recessions and recoveries. This simulated impact of an uncertainty shock is compared to vector autoregression estimations on actual data, showing a good match in both magnitude and timing. The paper also jointly estimates labor and capital adjustment costs (both convex and nonconvex). Ignoring capital adjustment costs is shown to lead to substantial bias, while ignoring labor adjustment costs does not.
2,256 citations
TL;DR: The authors developed a new index of economic policy uncertainty (EPU), built on three components: the frequency of newspaper references to economic policy uncertainties, the number of federal tax code provisions set to expire, and the extent of forecaster disagreement over future inflation and government purchases.
Abstract: Many commentators argue that uncertainty about tax, spending, monetary and regulatory policy slowed the recovery from the 2007-2009 recession. To investigate this we develop a new index of economic policy uncertainty (EPU), built on three components: the frequency of newspaper references to economic policy uncertainty, the number of federal tax code provisions set to expire, and the extent of forecaster disagreement over future inflation and government purchases. This EPU index spikes near consequential presidential elections and major events such as the Gulf wars and the 9/11 attack. It also rises steeply from 2008 onward. We then evaluate our EPU index, first on a sample of 3,500 human audited news articles, and second against other measures of policy uncertainty, with these suggesting our EPU index is a good proxy for actual economic policy uncertainty. Drilling down into our index we find that the post-2008 increase was driven mainly by tax, spending and healthcare policy uncertainty. Finally, VAR estimates show that an innovation in policy uncertainty equal to the increase from 2006 to 2011 foreshadows declines of up to 2.3% in GDP and 2.3 million in employment.
999 citations
Abstract: Bias-corrected bootstrap confidence intervals explicitly account for the bias and skewness of the small-sample distribution of the impulse response estimator, while retaining asymptotic validity in stationary autoregressions. Monte Carlo simulations for a wide range of bivariate models show that in small samples bias-corrected bootstrap intervals tend to be more accurate than delta method intervals, standard bootstrap intervals, and Monte Carlo integration intervals. This conclusion holds for VAR models estimated in levels, as deviations from a linear time trend, and in first differences. It also holds for random walk processes and cointegrated processes estimated in levels. An empirical example shows that bias-corrected bootstrap intervals may imply economic interpretations of the data that are substantively different from standard methods.
936 citations