Economic Policy Uncertainty, World Uncertainty, and Economic Growth: Evidence from a Bayesian Vector Autoregression Analysis

Abstract

This paper examines the relationship between the information content of newspaper-based Economic Policy Uncertainty (EPU) and the Economist Intelligence Unit (EIU) country report-based World Uncertainty (WUI) indices in relation to U.S. economic growth. Using data from 1990 to 2022 and incorporating a number of variables known to predict economic growth, our findings demonstrate the following: i) Based on different measures of WUI, whether U.S.-specific or global, and under various model specifications, we find that WUI is an important measure of uncertainty that negatively impacts real GDP growth. ii) EPU consistently exhibits a counterintuitive positive relationship with economic growth. iii) Variables such as corporate credit spreads and oil prices show a robust negative relationship with real GDP growth, while stock market returns are positively and robustly related to economic growth, underlying the importance of prices of financial assets and commodities for gauging the health of the economy.