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Economic Policy Uncertainty and Economic Activity: A Focus on Infrequent Structural Shifts

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  • Paraskevi Salamaliki

    (Zukunftskolleg and Department of Economics, University of Konstanz, Germany)

Abstract

We provide new evidence on the role of economic policy uncertainty (EPU) in aggregate real economic activity in the US using a multiple-horizon Granger causality framework, while allowing for infrequent shifts in mean levels and growth rates of the system variables. Our empirical investigation shows that the predictive ability of EPU for economic activity significantly depends on the presence (or absence) of infrequent structural shifts and the absence from the information set of a forward looking variable such as the stock market level. We do not find economic policy uncertainty effects on industrial production once we control for stock prices irrespective of segmented trends removal. There is some evidence that EPU anticipates employment in the short-run, yet, after re-moving rare events, EPU does not anticipate employment at any horizon. In contrast, the stock market level is found to contain strong predictive direct and indirect information for economic activity that is robust to the presence of infrequent trend breaks

Suggested Citation

  • Paraskevi Salamaliki, 2015. "Economic Policy Uncertainty and Economic Activity: A Focus on Infrequent Structural Shifts," Working Paper Series of the Department of Economics, University of Konstanz 2015-08, Department of Economics, University of Konstanz.
  • Handle: RePEc:knz:dpteco:1508
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    File URL: http://www.uni-konstanz.de/FuF/wiwi/workingpaperseries/WP_8_Salamaliki_2015.pdf
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    Cited by:

    1. Yonghong JIANG & Juan MENG & He NIE, 2018. "Visiting the Economic Policy Uncertainty Shocks - Economic Growth Relationship: Wavelet-based Granger-Causality in Quantiles Approac," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 80-94, December.

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    More about this item

    Keywords

    Economic policy uncertainty; real economic activity; Granger causality; Multi-horizon causality; Level shifts; Trend breaks; Vector autoregression;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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