Short and long run asymmetric effects of monetary and fiscal policy uncertainty on economic activity in the U.S.

Abstract

This paper extends the ongoing literature on the macroeconomic effects of monetary and fiscal policy uncertainty. It examined the asymmetric effects of monetary and fiscal policy uncertainty on economic activity in the short and long run using U.S. monthly data from 1985M1 to 2017M2. The industrial production index is used as a measure of economic activity while the Baker et al. (2016) news based monetary and fiscal policy uncertainty were used as measures of uncertainty. To analyse asymmetry, the paper employed the nonlinear autoregressive distributed lag (NARDL) model which allows one not only to capture the effects of positive and negative uncertainty but to do so in both short and long run. Hence this paper provides new evidence of possible existence of a nonlinear and asymmetric relationship between policy uncertainty and economic activity in the short and long run. The results show that monetary and fiscal policy uncertainty share long run relationship with economic activity. Further, the effect of monetary and fiscal policy uncertainties in the long run is asymmetric. Asymmetric effect in the short run was supported only for monetary policy uncertainty. These findings have important practical and policy implications.