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Uncertainty matters: evidence from close elections

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  • Redl, Chris

    () (Bank of England)

Abstract

This paper uses a data-rich environment to produce direct econometric estimates of macroeconomic and financial uncertainty for 11 advanced nations. These indices exhibit significant independent variation from popular proxies. Using this new data we control for both first and second moment financial shocks in identifying the real effects of macro uncertainty shocks. We further separate the identified macro shocks from financial shocks using narrative information, requiring that macro uncertainty rises during close elections. These are events which are likely to lead to macro uncertainty but are disjoint from a weakening in financial conditions. We find that macro uncertainty shocks matter for the vast majority of countries and that the real effects of macro uncertainty shocks are generally larger conditioning on close elections. These results are robust to controlling for credit spreads, financial uncertainty, global uncertainty and a measure of the first moment of the business cycle as proxied by a composite leading indicator.

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  • Redl, Chris, 2018. "Uncertainty matters: evidence from close elections," Bank of England working papers 722, Bank of England.
  • Handle: RePEc:boe:boeewp:0722
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    2. Christou, Christina & Gupta, Rangan, 2020. "Forecasting equity premium in a panel of OECD countries: The role of economic policy uncertainty," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 243-248.
    3. Danilo Cascaldi-Garcia & Deepa Dhume Datta & Thiago Revil T. Ferreira & Olesya V. Grishchenko & Mohammad R. Jahan-Parvar & Juan M. Londono & Francesca Loria & Sai Ma & Marius del Giudice Rodriguez & J, 2020. "What is Certain about Uncertainty?," International Finance Discussion Papers 1294, Board of Governors of the Federal Reserve System (U.S.).
    4. Mirela Miescu, 2019. "Uncertainty shocks in emerging economies," Working Papers 277077821, Lancaster University Management School, Economics Department.
    5. Aviral Kumar Tiwari & Micheal Kofi Boachie & Rangan Gupta, 2021. "Network Analysis of Economic and Financial Uncertainties in Advanced Economies: Evidence from Graph-Theory," Advances in Decision Sciences, Asia University, Taiwan, vol. 25(1), pages 188-215, March.
    6. Raffaella Giacomini & Toru Kitagawa & Matthew Read, 2021. "Identification and Inference Under Narrative Restrictions," Papers 2102.06456, arXiv.org.
    7. Michael Ryan, 2020. "A Narrative Approach to Creating Instruments with Unstructured and Voluminous Text: An Application to Policy Uncertainty," Working Papers in Economics 20/10, University of Waikato.
    8. Firrell, Alastair & Reinold, Kate, 2020. "Uncertainty and voting on the Bank of England’s Monetary Policy Committee," Bank of England working papers 898, Bank of England.
    9. Rivolta, Giulia & Trecroci, Carmine, 2020. "Measuring the effects of U.S. uncertainty and monetary conditions on EMEs' macroeconomic dynamics," MPRA Paper 99403, University Library of Munich, Germany.

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    More about this item

    Keywords

    Economic uncertainty; business cycles; elections;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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