Economic policy uncertainty: A literature review

The significance of uncertainty in policies related to economic decisions is higher than ever before in today’s interconnected world. This study contributes to existing research by reviewing the literature on the impact of economic policy uncertainty on corporations and economies worldwide. We show the importance of measuring and tracking uncertainty by highlighting its influence on financial decisions. We examine the growing number of studies that use the economic policy uncertainty index (EPU) of Baker, Bloom, and Davis (2016) as a key factor in measuring uncertainty. We then review the impact of EPU on financial markets, macro and micro level, stock markets, corporate behavior, and risk management. Then, we document the asymmetric policy responses of economic uncertainty. Overall, policy uncertainty has a significant impact on firm financial policies as well as on consumer spending. Specifically, corporations act more conservatively during times of high uncertainty, thereby slowing investments in production and employment. In addition to the local effect of EPU, it spills over to other countries.