Ruhr Economic Papers

Ruhr Economic Papers #761

On the Time-Varying Effects of Economic Policy Uncertainty on the US Economy

by Jan Prüser and Alexander Schlösser

RGS, RWI, UDE, 08/2018, 33 S./p., 8 Euro, ISBN 978-3-86788-886-8 DOI: 10.4419/86788886



We study the time-varying impact of Economic Policy Uncertainty (EPU) on the US Economy by using a VAR with time-varying coefficients. The coefficients are allowed to evolve gradually over time which allows us to discover structural changes without imposing them a priori. We find three different regimes which match the three major business cycles of the US economy, namely the Great Inflation, the Great Moderation and the Great Recession. This finding is in contrast to previous literature which typically imposes two regimes a priori. Furthermore, we distinguish the effect of EPU on real economic activity and on financial markets.

JEL-Classification: C11, C32, E20, E60

Keywords: TVP-FAVAR; economic policy uncertainty; fat data