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

Ahdi Noomen Ajmi, Rangan Gupta () and Patrick Kanda ()
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Patrick Kanda: Department of Economics, University of Pretoria

No 201361, Working Papers from University of Pretoria, Department of Economics

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 (search for similar items in EconPapers)
JEL-codes: C14 C32 D80 E22 E66 F43 G18 L50 O40 (search for similar items in EconPapers)
Date: 2013-10
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