Policy Uncertainty, Macroeconomic Dynamics, And US Unemployment Conditions

Abstract

This study provides empirical verification of the link between policy uncertainty[1], unemployment rate and other key US macroeconomic and performance indicators. A VAR augmented model (augmented by impulse responds function (IRF)) and Granger Causality test are employed in this study. Empirical results based on quarterly time series data (spanning the period 1960 to 2011) shows deficit induced policy uncertainty has significant negative impact on key US macroeconomic and performance indicators. This study also finds that one standard deviation policy uncertainty shock has immediate and significant negative impact on unemployment rate, GDP growth and other indicators tested. Concluding Granger causality test also shows deficit induced policy uncertainty granger cause variability in GDP and fixed private investment growth.

[1] Measured in terms of Relative Political Capacity (RPC) formally introduced by Organski and Kugler (1980); and modified by Kugler and Arbetman (1997).