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

Author

Listed:
  • 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)

Abstract
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.

Suggested Citation

  • Ahdi N. Ajmi & Rangan Gupta & Patrick T. Kanda, 2013. "Causality between Economic Policy Uncertainty across Countries: Evidence from Linear and Nonlinear Tests," Working Papers 201361, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201361
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    Citations

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    Cited by:

    1. 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.
    2. Gong, Yuting & He, Zhongzhi & Xue, Wenjun, 2022. "EPU spillovers and stock return predictability: A cross-country study," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 78(C).
    3. Antonakakis, Nikolaos & Gabauer, David & Gupta, Rangan & Plakandaras, Vasilios, 2018. "Dynamic connectedness of uncertainty across developed economies: A time-varying approach," Economics Letters, Elsevier, vol. 166(C), pages 63-75.
    4. Christou, Christina & Gupta, Rangan & Hassapis, Christis, 2017. "Does economic policy uncertainty forecast real housing returns in a panel of OECD countries? A Bayesian approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 50-60.
    5. Chuliá, Helena & Gupta, Rangan & Uribe, Jorge M. & Wohar, Mark E., 2017. "Impact of US uncertainties on emerging and mature markets: Evidence from a quantile-vector autoregressive approach," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 48(C), pages 178-191.
    6. Gupta, Rangan & Pierdzioch, Christian & Risse, Marian, 2016. "On international uncertainty links: BART-based empirical evidence for Canada," Economics Letters, Elsevier, vol. 143(C), pages 24-27.
    7. Aloui, Riadh & Gupta, Rangan & Miller, Stephen M., 2016. "Uncertainty and crude oil returns," Energy Economics, Elsevier, vol. 55(C), pages 92-100.
    8. Gabauer, David & Gupta, Rangan, 2018. "On the transmission mechanism of country-specific and international economic uncertainty spillovers: Evidence from a TVP-VAR connectedness decomposition approach," Economics Letters, Elsevier, vol. 171(C), pages 63-71.

    More about this item

    Keywords

    Economic policy uncertainty; causality; linear; nonlinear;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • 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
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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