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Time-Varying impact of uncertainty shocks on macroeconomic variables of the united kingdom: Evidence from over 150 years of monthly data

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  • Christou, Christina
  • Gabauer, David
  • Gupta, Rangan

Abstract

In this paper, we analyse the impact of uncertainty (corporate bond spread) shock on inflation rate, unemployment rate, monetary policy rate, and nominal exchange rate returns of the United Kingdom over the monthly period of 1855:01 to 2016:12. Given that we use data spanning over one and a half century, we use a time-varying parameter vector autoregressive (TVP-VAR) model. We find that a positive uncertainty shock reflects a negative demand shock as suggested by theory, and results in declines in the inflation, interest rate and dollar-pound exchange rate returns, and an increase in the unemployment rate. However, this impact varies over time, with the strongest effect observed for the period after World War II until the start of the Great Moderation, and during the recent global crisis. Our results are in general robust to an alternative econometric framework (breaks-based VAR) and a metric of uncertainty (stock market volatility).

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  • Christou, Christina & Gabauer, David & Gupta, Rangan, 2020. "Time-Varying impact of uncertainty shocks on macroeconomic variables of the united kingdom: Evidence from over 150 years of monthly data," Finance Research Letters, Elsevier, vol. 37(C).
    • Handle: RePEc:eee:finlet:v:37:y:2020:i:c:s1544612319309936
    DOI: 10.1016/j.frl.2019.101363
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    Cited by:

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    3. Ding, Xiaoli & Cheng, Sang & Qin, Wenjing & Gu, Xin, 2023. "Does uncertainty affect graduates’ decision to relocate for work? Evidence at China’s city level," Economic Analysis and Policy, Elsevier, vol. 79(C), pages 10-19.
    4. Qin, Yun & Chen, Jinyu & Dong, Xuesong, 2021. "Oil prices, policy uncertainty and travel and leisure stocks in China," Energy Economics, Elsevier, vol. 96(C).
    5. Esmaeili, Parisa & Rafei, Meysam, 2021. "Dynamics analysis of factors affecting electricity consumption fluctuations based on economic conditions: Application of SVAR and TVP-VAR models," Energy, Elsevier, vol. 226(C).
    6. Mehmet Balcilar & David Gabauer & Rangan Gupta & Christian Pierdzioch, 2021. "Uncertainty and Forecastability of Regional Output Growth in the United Kingdom: Evidence from Machine Learning," Working Papers 202111, University of Pretoria, Department of Economics.
    7. Mehmet Balcilar & David Gabauer & Rangan Gupta & Christian Pierdzioch, 2022. "Uncertainty and forecastability of regional output growth in the UK: Evidence from machine learning," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 41(6), pages 1049-1064, September.
    8. Bush, Georgia & López Noria, Gabriela, 2021. "Uncertainty and exchange rate volatility: Evidence from Mexico," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 704-722.
    9. Oguzhan Cepni & Hardik A. Marfatia & Rangan Gupta, 2021. "The Time-Varying Impact of Uncertainty Shocks on the Comovement of Regional Housing Prices of the United Kingdom," Working Papers 202168, University of Pretoria, Department of Economics.
    10. Gupta, Rangan & Pierdzioch, Christian & Salisu, Afees A., 2022. "Oil-price uncertainty and the U.K. unemployment rate: A forecasting experiment with random forests using 150 years of data," Resources Policy, Elsevier, vol. 77(C).

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    More about this item

    Keywords

    Uncertainty; Macroeconomic effects; Time-varying vector autoregression; United Kingdom;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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