Financial Stress and Economic Policy Uncertainty: Impulse Response Functions and Causality

International Research Journal of Applied Finance, 3(11), 1633-1637

8 Pages Posted: 8 Jul 2012 Last revised: 22 Nov 2012

Vichet Sum

University of Maryland Eastern Shore - School of Business and Technology

Date Written: July 6, 2012

Abstract

This study employs the vector autoregression (VAR) analysis to empirically report the impulse response functions of economic policy certainty and financial stress. A causality test of these two variables is also performed. The analysis of the monthly changes in the economic policy uncertainty index and the Federal Reserve Bank of St. Louis Financial Stress Index from 1994:1 to 2012:5 including up 9 lags shows that the financial stress jumps in the first, fifth, and eighth through twelfth months following economic policy shocks. In addition, economic policy uncertainty jumps in the first, third, fourth, sixth, seventh, and ninth months following financial stress shocks. The Granger causality test shows that financial stress and economic policy uncertainty Granger-cause each other. The time-series OLS regression analysis shows a statistically significant positive coefficient (b = 24.16609; t = 6.56) when monthly changes of financial stress is the independent variable.

Keywords: policy uncertainty, financial stress, business cycle

JEL Classification: E32, E60, G20

Suggested Citation

Sum, Vichet, Financial Stress and Economic Policy Uncertainty: Impulse Response Functions and Causality (July 6, 2012). International Research Journal of Applied Finance, 3(11), 1633-1637. Available at SSRN: https://ssrn.com/abstract=2101549 or http://dx.doi.org/10.2139/ssrn.2101549

Vichet Sum (Contact Author)

University of Maryland Eastern Shore - School of Business and Technology ( email )

2105 Kiah Hall
Princess Anne, MD 21853
United States
410-651-6531 (Phone)
410-651-6529 (Fax)

HOME PAGE: http://www.umes.edu/bma/Sum.html

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