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Causality between Economic Policy Uncertainty across Countries: Evidence from Linear and Nonlinear Tests

Listed author(s):
  • Ahdi N. Ajmi


    (College of Science and Humanities in Slayel, Salman bin Abdulaziz University, Kingdom of Saudi Arabia)

  • Rangan Gupta


    (Department of Economics, University of Pretoria)

  • Patrick T. Kanda


    (Department of Economics, University of Pretoria)

Following the 2007-2009 global recession, economic policy uncertainty and its effect on economic recovery has become an issue of interest in academic, media as well as policy-making circles (Baker et al., 2013). Given this backdrop, we investigate causality between economic policy uncertainty in some of the world's major economies using the economic policy uncertainty index developed by Baker et al. (2013). We implement both the traditional linear and the nonlinear variants of the Granger causality test. Based on the Diks and Panchenko (2005) non-linear Granger causality test, we find significant evidence of bidirectional causality between countries' economic policy uncertainty across the sample. The results are consistent with the fact that the global economy has become more integrated through trade, financial and confidence linkages. Also, our findings highlight that inference from traditional (linear) Granger causality test can be misleading in the presence of non-linearity in the data.

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Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201361.

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Length: 16 pages
Date of creation: Oct 2013
Handle: RePEc:pre:wpaper:201361
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