AIM : This article explores the extent to which economic policy uncertainty (EPU) influences
selected macroeconomic variables in South Africa (SA).
METHODS : To this end, I construct a constant parameter vector autoregressive (VAR) model and
a time-varying parameter (TVP) VAR model, where the latter model evaluates if the impact of
uncertainty on the macroeconomic variables has changed over time.
SETTING : The models are estimated using quarterly South African data over the period 1990 to
2015, which include industrial production growth, consumer price inflation, 10-year
government bond yield, real effective exchange rate, and economic policy uncertainty.
Cholesky ordering of the variables are imposed to recover the orthogonal shocks.
RESULTS : The results of the constant parameter VAR model suggest that an unanticipated
positive shock to the uncertainty index results in a decline in industrial production and real
effective exchange rate, while fostering an increase in the general price level and 10-year
government bond yield. Time-varying impulse responses show that the impact of uncertainty
shocks on the selected macroeconomic variables has declined systematically over time. This is
perhaps intuitive as the new unanticipated information is gradually picked up by media over
time and incorporated into rational agents’ decision-making.
CONCLUSION : The transmission of a positive uncertainty shock to the real economy has timevarying