Abstract
In light of the rising political and economic uncertainty in Europe, we aim to provide a basic understanding of the impact of policy and stock market uncertainty on a set of macroeconomic variables such as production and investment. In this paper, we apply a structural vector autoregressive (SVAR) model to gain first insights that may help to identify avenues for further research. We find that stock market volatility shows a fairly consistently negative effect. However, the implications of policy uncertainty for Europe and the euro area in particular are not so straightforward.
References
Aastveit, K. A., G. J. Natvik and S. Sola (2013): Economic Uncertainty and the Effectiveness of Monetary Policy. Norges Bank Working Paper No. 2013/17, Norges Bank Research, Oslo.10.2139/ssrn.2353008Search in Google Scholar
Abel, A. B. (1983): Optimal Investment under Uncertainty, American Economic Review 73(1), 228–233.Search in Google Scholar
Alexopoulos, M. and J. Cohen (2015): The Power of Print: Uncertainty Shocks, Markets, and the Economy, International Review of Economics & Finance 40, 8–28.10.1016/j.iref.2015.02.002Search in Google Scholar
Arkolakis, C., A. Doxiadis and M. Manolis Galeniano (2014): The Challenge of Trade Adjustment in Greece, 13th Conference on Research on Economic Theory & Econometrics, Milos/Crete, July 13–17.10.7551/mitpress/9780262035835.003.0003Search in Google Scholar
Arnold, I. J. and E. B. Vrugt (2008): Fundamental Uncertainty and Stock Market Volatility, Applied Financial Economics 18(17), 1425–1440.10.1080/09603100701857922Search in Google Scholar
Baele, L., V. De Bruyckere, O. De Jonghe and D. Vander Vennet (2015): Model Uncertainty and Systematic Risk in US Banking, Journal of Banking & Finance 53, 49–66.10.1016/j.jbankfin.2014.11.012Search in Google Scholar
Baker, S. R. and N. Bloom (2013): Does Uncertainty Reduce Growth? Using Disasters as Natural Experiments. NBER Working Papers 19475, National Bureau of Economic Research, Inc., Cambridge, MA.10.3386/w19475Search in Google Scholar
Baker, S., N. Bloom and S. J. Davis (2012): Has Economic Policy Uncertainty Hampered the Recovery?, in: L. E. Ohanian, J. B. Taylor and I. Wright (eds.) Government Policies and the Delayed Economic Recovery. Hoover Institution Press, Stanford.10.2139/ssrn.2009451Search in Google Scholar
Baker, S. R., N. Bloom and S. J. Davis (2015): Measuring Economic Policy Uncertainty. NBER Working Paper 21633, National Bureau of Economic Research, Cambridge/MA.10.3386/w21633Search in Google Scholar
Belke, A. and M. Goecke (2005): Real Options Effects on Employment: Does Exchange Rate Uncertainty Matter for Aggregation?, German Economic Review 6(2), 185–203.10.1111/j.1465-6485.2005.00126.xSearch in Google Scholar
Belke, A., M. Goecke and M. Hebler (2005): Institutional Uncertainty and European Social Union: Impacts on Job Creation and Destruction in the CEECs, Journal of Policy Modelling 27(3), 345–354.10.1016/j.jpolmod.2005.02.001Search in Google Scholar
Belke, A. and D. Kronen (2016): Exchange Rate Bands of Inaction and Play-Hysteresis in Greek Exports to the Euro Area, the US and Turkey: Sectoral Evidence, Empirica 43(2), 349–390.10.1007/s10663-016-9319-5Search in Google Scholar
Belke, A. and T. Osowski (2017): International Effects of Euro Area versus US Policy Uncertainty: A FAVAR Approach. Ruhr Economic Papers No. 689, Essen.Search in Google Scholar
Bentolila, S. and G. Bertola (1990): Firing Costs and Labour Demand: How Bad Is Euroscle-Rosis?, Review of Economic Studies 57, 381–402.10.2307/2298020Search in Google Scholar
Bernal, O., J.-Y. Gnabo and G. Guilmin (2014): Assessing the Contribution of Banks, Insurance and Other Financial Services to Systemic Risk, Journal of Banking & Finance 47, 270–287.10.1016/j.jbankfin.2014.05.030Search in Google Scholar
Bernanke, B. (1986): Alternative Explanations of the Money-Income Correlation, Carnegie-Rochester Conference Series on Public Policy 25(1), 49–99.10.3386/w1842Search in Google Scholar
Bloom, N. (2009): The Impact of Uncertainty Shocks. Econometrica 77(3), 623–685.Search in Google Scholar
Bloom, N. (2013): Fluctuations in Uncertainty. CEP Occasional Paper 38, Centre for Economic Performance, London School of Economics and Political Science, London, December.10.3386/w19714Search in Google Scholar
Bloom, N., M. Floetotto, N. Jaimovich, I. Saporta-eksten and S. J. Terry (2013): Really Uncertain Business Cycles, CEP Discussion Paper No. 1195, Centre for Economic Performance, London School of Economics and Political Science, March10.3386/w18245Search in Google Scholar
Bordo, M. D., J. V. Duca and C. Koch (2016): Economic Policy Uncertainty and the Credit Channel: Aggregate and Bank Level U.S. Evidence over Several Decades, NBER Working Paper 22021, National Bureau of Economic Research. Cambridge/MA.10.3386/w22021Search in Google Scholar
Boudoukh, J., R. Feldman, S. Kogan and M. Richardson (2013): Which News Moves StockPrices? A Textual Analysis. Tech. rep., National Bureau of Economic Research.10.3386/w18725Search in Google Scholar
Caballero, R. J. (1991): On the Sign of the Investment-Uncertainty Relationship, American Economic Review 81, 279–288.Search in Google Scholar
Caggiano, G., E. Castelnuovo and G. Pellegrino (2017): Estimating the Real Effects of Uncertainty Shocks at the Zero Lower Bound, Bank of Finland Research Discussion Paper 6, Helsinki.10.2139/ssrn.3038667Search in Google Scholar
Chau, F., R. Deesomsak and J. Wang (2014): Political Uncertainty and Stock Market Volatility in the Middle East and North African (MENA) Countries, Journal of International Financial Markets, Institutions and Money 28, 1–19.10.1016/j.intfin.2013.10.008Search in Google Scholar
Chen, J., F. Jiang and G. Tong (2016): Economic Policy Uncertainty in China and Stock Market Expected Returns. Beijing, mimeo.10.2139/ssrn.2808862Search in Google Scholar
Dania, A. and D. K. Malhotra (2016): Impact of TED Spread, Bond Spread, and Implied Volatility on Stock Market Returns, Oil Prices, Home Prices and Exchange Rates, International Journal of Bonds and Derivatives 2(4), 329–343.10.1504/IJBD.2016.081375Search in Google Scholar
Darby, J., A. Hughes Hallet, J. Ireland and L. Piscitelli (1998): The Impact of Exchange Rate Uncertainty on the Level of Investment. CEPR Discussion Paper No. 1896, Center for Economic Policy Research, London.10.1111/1468-0297.00416Search in Google Scholar
Dixit, A. (1989): Entry and Exit Decisions under Uncertainty, Journal of Political Economy 97, 620–638.10.1086/261619Search in Google Scholar
Dornbusch, R. (1987): Open Economy Macroeconomics: New Directions, NBER Working Paper No. 2372, National Bureau of Economic Research, Cambridge/MA.10.3386/w2372Search in Google Scholar
Engle, R. and J. G. Rangel (2008): The Spline-GARCH Model for Low-Frequency Volatility and Its Global Macroeconomic Causes, Review of Financial Studies 21(3), 1187–1222.10.1093/rfs/hhn004Search in Google Scholar
Gulen, H. and M. Ion (2016): Policy Uncertainty and Corporate Investment, Review of Financial Studies 29(3), 523–564.10.1093/rfs/hhv050Search in Google Scholar
Hartman, R. (1972): The Effects of Price and Cost Uncertainty on Investment, Journal of Economic Theory 5(2), 258–266.10.1016/0022-0531(72)90105-6Search in Google Scholar
Hassett, K. A. and G. E. Metcalf (1999): Investment with Uncertain Tax Policy: Does Random Tax Policy Discourage Investment, The Economic Journal 109(457), 372–393.10.3386/w4780Search in Google Scholar
Higgs, R. (1997): Regime Uncertainty: Why the Great Depression Lasted so Long and WhyProsperity Resumed after the War, Independent Review - Oakland 1(4), 561–590.Search in Google Scholar
Imf (2016): United Kingdom - Selected Issues. IMF Country Report No. 16/169, International Monetary Fund, Washington/DC, June.10.5089/9781484395370.002Search in Google Scholar
Jiang, F. and G. Tong (2016): Monetary Policy Uncertainty and Bond Risk Premium. Beijing, mimeo.10.2139/ssrn.2831092Search in Google Scholar
Jo, S. and R. Sekkel (2015): Macroeconomic Uncertainty through the Lens of Professional Forecasters. Staff Working Papers. Bank of Canada. Vol. 16 (5), OttawaSearch in Google Scholar
Kang, W., K. Lee and R. A. Ratti (2014): Economic Policy Uncertainty and Firm-Level Investment, Journal of Macroeconomics 39, 42–53.10.1016/j.jmacro.2013.10.006Search in Google Scholar
Lashgari, M. (2000): The Role of TED Spread and Confidence Index in Explaining the Behavior of Stock Prices, American Business Review 18.2, 9–11.Search in Google Scholar
Leduc, S. and L. Zheng (2016): Uncertainty Shocks Are Aggregate Demand Shocks, Journal of Monetary Economics 28, 20–35.10.1016/j.jmoneco.2016.07.002Search in Google Scholar
Liu, L. and T. Zhang (2015): Economic Policy Uncertainty and Stock Market Volatility, Finance Research Letters 15, 99–105.10.1016/j.frl.2015.08.009Search in Google Scholar
Oi, W. (1961): The Desirability of Price Instability under Perfect Competition, Econometrica 29, 58–64.10.2307/1907687Search in Google Scholar
Panousi, V. and D. Papanikolaou (2011): Investment, Idiosyncratic Risk and Ownership, Journal of Finance 67, 1113–1148.10.1111/j.1540-6261.2012.01743.xSearch in Google Scholar
Pástor, L. and P. Veronesi (2013): Political Uncertainty and Risk Premia, Journal of Financial Economics 110(3), 520–545.10.3386/w17464Search in Google Scholar
Pindyck, R. S. (1991): Irreversibility, Uncertainty, and Investment, Journal of Economic Literature 29, 1110–1148.10.3386/w3307Search in Google Scholar
Ramey, G. and V. Ramey (1995): Cross-Country Evidence on the Link between Volatility and Growth, American Economic Review 85(5), 1138–1151.10.3386/w4959Search in Google Scholar
Rodrik, D. (1991): Policy Uncertainty and Private Investment in Developing Countries, Journal of Development Economics 36(2), 229–242.10.3386/w2999Search in Google Scholar
Romer, C. (1990): The Great Crash and the Onset of the Great Depression, Quarterly Journal of Economics 105(3), 597–624.10.3386/w2639Search in Google Scholar
Sherlock, C., P. Fearnhed and G. O. Roberts (2010): The Random Walk Metropolis: Linking Theory and Practice through a Case Study, Statistical Science 25(2), 172–190.10.1214/10-STS327Search in Google Scholar
Sims, C. (1986): Are Forecasting Models Usable for Policy Analysis?, Econometrica 67(5), 1113–1156.10.21034/qr.1011Search in Google Scholar
Stock, J. H. and M. W. Watson (2016): Dynamic Factor Models, Factor-Augmented Vector Autoregressions and Structural Vector Autoregressions in Macroeconomics, Handbook of Macroeconomics 2, 415–525.10.1016/bs.hesmac.2016.04.002Search in Google Scholar
Uhlig, H. (2005): What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure, Journal of Monetary Economics 52, 381–419.10.1016/j.jmoneco.2004.05.007Search in Google Scholar
© 2017 Oldenbourg Wissenschaftsverlag GmbH, Published by De Gruyter Oldenbourg, Berlin/Boston
