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Economic Policy Uncertainty

In: Public-Private Partnership and Policy Uncertainty

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  • Weijie Luo

    (Beijing International Studies University)

Abstract

This paper analyzes the impact of economic policy uncertainty on firm performance. Utilizing a news-based index of economic policy uncertainty developed by Baker et al. (2016) and firm-level data in China, firm investment, employment, and revenue are found to be negatively associated with policy-related economic uncertainty. This negative relationship is weakened in state-owned enterprises (a fall in investment of 5.61%, employment growth of 0.09%, and sales growth of 0.31%) compared to that of non-state-owned enterprises (a fall in investment of 7.79%, employment growth of 0.14%, and sales growth of 0.34%). We explore several potential explanations and find evidence supporting that economic policy uncertainty reduces the incentives of firms to expand their operation through the mechanism of risk-taking, cash holdings and tax burden. Given this microscopic study on mechanisms, our analysis provides a reference for policy-makers to effectively reduce economic fluctuations.

Suggested Citation

  • Weijie Luo, 2025. "Economic Policy Uncertainty," Springer Books, in: Public-Private Partnership and Policy Uncertainty, chapter 0, pages 31-50, Springer.
    • Handle: RePEc:spr:sprchp:978-981-96-8074-0_3
    DOI: 10.1007/978-981-96-8074-0_3
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