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

30 Pages Posted: 2 Feb 2015

See all articles by Ahdi Noomen Ajmi

Ahdi Noomen Ajmi

BESTMOD (Business & Economic Statistics Modelling) - Statistics Department

Rangan Gupta

University of Pretoria - Department of Economics

Patrick Kanda

University of Pretoria - Department of Economics

Date Written: April 1, 2014

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.

Keywords: economic policy uncertainty, causality, linear, nonlinear

JEL Classification: C14, C32, D80, E22, E66, F43, G18, L50, O40

Suggested Citation

Ajmi, Ahdi Noomen and Gupta, Rangan and Kanda, Patrick, Causality between Economic Policy Uncertainty Across Countries: Evidence from Linear and Nonlinear Tests (April 1, 2014). Frontiers in Finance and Economics, Vol. 11, No. 1, 73-102, 2014, Available at SSRN: https://ssrn.com/abstract=2558760

Ahdi Noomen Ajmi

BESTMOD (Business & Economic Statistics Modelling) - Statistics Department ( email )

Institut superieur de Gestion de Tunis
41, Av. de la Liberte
Bouchoucha, Bardo 2000
Tunisia
0021698633950 (Phone)

Rangan Gupta (Contact Author)

University of Pretoria - Department of Economics ( email )

Lynnwood Road
Hillcrest
Pretoria, 0002
South Africa

Patrick Kanda

University of Pretoria - Department of Economics ( email )

Lynnwood Road
Hillcrest
Pretoria, 0002
South Africa

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