Skip to content
Accessible Unlicensed Requires Authentication Published by De Gruyter Oldenbourg August 22, 2017

The Impact of Policy Uncertainty on Macro Variables – An SVAR-Based Empirical Analysis for EU Countries

Dominik Kronen and Ansgar Belke
From the journal Review of Economics

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.

JEL Classification: C32; E20; E60

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.Search 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.Search 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.Search in Google Scholar

Arnold, I. J. and E. B. Vrugt (2008): Fundamental Uncertainty and Stock Market Volatility, Applied Financial Economics 18(17), 1425–1440.Search 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.Search 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.Search 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.Search 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.Search 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.Search 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.Search 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.Search 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.Search 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.Search in Google Scholar

Bernanke, B. (1986): Alternative Explanations of the Money-Income Correlation, Carnegie-Rochester Conference Series on Public Policy 25(1), 49–99.Search 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.Search 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, MarchSearch 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.Search 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.Search 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.Search 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.Search in Google Scholar

Chen, J., F. Jiang and G. Tong (2016): Economic Policy Uncertainty in China and Stock Market Expected Returns. Beijing, mimeo.Search 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.Search 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.Search in Google Scholar

Dixit, A. (1989): Entry and Exit Decisions under Uncertainty, Journal of Political Economy 97, 620–638.Search in Google Scholar

Dornbusch, R. (1987): Open Economy Macroeconomics: New Directions, NBER Working Paper No. 2372, National Bureau of Economic Research, Cambridge/MA.Search 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.Search in Google Scholar

Gulen, H. and M. Ion (2016): Policy Uncertainty and Corporate Investment, Review of Financial Studies 29(3), 523–564.Search in Google Scholar

Hartman, R. (1972): The Effects of Price and Cost Uncertainty on Investment, Journal of Economic Theory 5(2), 258–266.Search 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.Search 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.Search in Google Scholar

Jiang, F. and G. Tong (2016): Monetary Policy Uncertainty and Bond Risk Premium. Beijing, mimeo.Search 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.Search 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.Search in Google Scholar

Liu, L. and T. Zhang (2015): Economic Policy Uncertainty and Stock Market Volatility, Finance Research Letters 15, 99–105.Search in Google Scholar

Oi, W. (1961): The Desirability of Price Instability under Perfect Competition, Econometrica 29, 58–64.Search in Google Scholar

Panousi, V. and D. Papanikolaou (2011): Investment, Idiosyncratic Risk and Ownership, Journal of Finance 67, 1113–1148.Search in Google Scholar

Pástor, L. and P. Veronesi (2013): Political Uncertainty and Risk Premia, Journal of Financial Economics 110(3), 520–545.Search in Google Scholar

Pindyck, R. S. (1991): Irreversibility, Uncertainty, and Investment, Journal of Economic Literature 29, 1110–1148.Search 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.Search in Google Scholar

Rodrik, D. (1991): Policy Uncertainty and Private Investment in Developing Countries, Journal of Development Economics 36(2), 229–242.Search in Google Scholar

Romer, C. (1990): The Great Crash and the Onset of the Great Depression, Quarterly Journal of Economics 105(3), 597–624.Search 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.Search in Google Scholar

Sims, C. (1986): Are Forecasting Models Usable for Policy Analysis?, Econometrica 67(5), 1113–1156.Search 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.Search 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.Search in Google Scholar

Published Online: 2017-8-22
Published in Print: 2017-9-26

© 2017 Oldenbourg Wissenschaftsverlag GmbH, Published by De Gruyter Oldenbourg, Berlin/Boston