Of Votes and Viruses: The UK Economy and Economic Policy Uncertainty
25 Pages Posted: 8 Jun 2021 Last revised: 10 Aug 2021
Date Written: August 10, 2021
This paper examines the relation between GDP growth, Divisia money growth, CPI inflation, financial stress, and the United Kingdom's economic policy uncertainty in the context of its departure from the European Union. We employ two Bayesian VAR models which account for the extreme observations in macroeconomic and financial time series resulting from the COVID-19 pandemic outbreak. We document a contractionary effect of an economic policy uncertainty shock on GDP growth, which is not present in a model which does not account for the COVID-19-related outliers. Additionally, we find that GDP growth is enhanced by Divisia monetary stimulus but hampered by increases in financial stress. The results from a stochastic volatility in mean threshold model also uncover different dynamics of transmission of shocks between economic uncertainty and the indicators we study across high and low economic policy uncertainty regimes.
Keywords: Brexit, COVID-19, Economic Policy Uncertainty, VAR models
JEL Classification: E52, C30, C51
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