The effects of economic policy uncertainty and inflation uncertainty on G.D.P. and inflation in industrial countries.

Abstract

In this paper, I examine the effects of inflation uncertainty and economic policy uncertainty on G.D.P. and inflation in 9 industrial countries (Australia, Canada, France, Germany, Greece, Japan, Spain, U.K., U.S.). In the first part of my paper, I examine the effects of inflation uncertainty, in order to extract a measure of inflation uncertainty, I employ exponential generalized autoregressive conditional heteroscedasticity models (E-GARCH). Then, I use Granger-causality tests. These tests allow me to investigate the causal relationships between inflation uncertainty, GDP and inflation. Lastly, I use impulse responses and I examine how a change in inflation uncertainty affects GDP and inflation. The results show that a shock in inflation, affects inflation uncertainty in 7 of 9 countries that are used in my analysis (Japan, Canada, Australia, France, Greece, U.K., U.S.) and a shock in inflation uncertainty affects inflation in 5 of 9 countries (Japan, Canada, Spain, U.K., U.S.). Also, a shock in inflation uncertainty affects GDP in 4 of the 9 countries (Canada, Spain, U.K., U.S.). Lastly, I notice that the effects of inflation uncertainty are somewhat weaker in comparison with the effects of inflation. The second part of this paper shows the possible effects of economic policy uncertainty on GDP and inflation. I examine the influence of economic policy uncertainty to the other two variables (inflation, GDP) using VAR analysis. Subsequently, using again impulse responses I investigate how my variables (GDP, inflation) are reacting to possible shocks of economic policy uncertainty and the time, which they need, in order to adjust to those changes. The results show that, an impulse on e.p.u. seem to have a weak effect in GDP in 5 of the 9 countries (Japan, Canada, France, Spain, U.S.), but I found that those impulses have no effects on inflation.