Economic Policy Uncertainty and Industrial Activity: An Evidence from Pakistan

Economic Policy Uncertainty is defined as a state wherein the policymakers, or institutions are uncertain about the future course of economic policies owing to a myriad of factors ranging from economic conditions and political tensions to geo-politics. The pioneering work of Baker, Bloom and Davis (2016) brought-in a new way of thinking in economics; whereby, introducing newspaper-based uncertainty to reflect on economic policies and resulting impacts thereof on a whole lot of economic conditions including real sector activity. This paper follows Choudhary, Pasha and Waheed (2020) to check if uncertainty has negative implications for production in Pakistan. I use the VECM model to see if there exists a long-term relationship between economic policy uncertainty and real activity in Pakistan; alongside that, I also make use of a bivariate SVAR to further enrich analysis. My findings conform to this notion that uncertainty does affect production and real activity.