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Measuring uncertainty and its effects on the economy

Pan, W.-F. (2021) Measuring uncertainty and its effects on the economy. PhD thesis, University of Reading

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To link to this item DOI: 10.48683/1926.00105470


This thesis consists of three independent essays measuring uncertainty and its impact on the economy. The first essay applies textual analysis for Chinese newspapers to construct economic uncertainty index. The second essay aims to measure U.S. regional economic uncertainty by adopting alternative approach, which is based on internet search volume from Google. To shed light on whether fiscal policy uncertainty has negative effect on the economy, the last essay focuses on the effect of fiscal policy uncertainty on U.S. labour markets. The first essay develops a new economic uncertainty (EU) index based on Chinese newspapers to address the media coverage bias of existing measures. We investigate how EU affects China’s macroeconomy. Our results suggest that EU reduces aggregate output. We find that uncertainty predicts fluctuations in economic activity and actual economic activity also predicts EU, but nonlinearly. Furthermore, we show that uncertainty in the United States leads to uncertainty in China, implying that negative EU on the Chinese economy is coming from the U.S. Finally, we conduct some asset pricing tests, showing that EU can predict stock returns and commands risk premium. Our results are helpful for both researchers and policymakers to stabilize the economy and financial markets in China. The second essay constructs a set of new economic uncertainty (EU) indices for the United States based on the internet search volumes. Different from other existing measures, these indices shed light on the regional and local situations along with national EU. Based on these indices, it is observed that although overall state-level EU is highly synchronized, idiosyncratic state’s EU nonetheless exhibits large variations. Similar to aggregate EU, idiosyncratic state’s EU is generally countercyclical. There is also a spillover effect among US regions. Lastly, we show that idiosyncratic state’s EU foreshadows declines in aggregate employment and output. ii The third essay examines the effect of fiscal policy uncertainty (FPU) on job searches and labour demand in the United States. We first develop search-based job search indices and find that increased FPU leads to lower job search levels. At the same time, when FPU rises, labour demand is also reduced. The effect of FPU varies across different regions and is also affected by the prevailing monetary policy stance and level of government debt. Labour market institutions can help explain these differences. Finally, FPU reduces matching efficiency in labour markets. These results are robust to alternative specifications, consideration of the effect of risk on uncertainty, and the endogeneity problem.

Item Type:Thesis (PhD)
Thesis Supervisor:Wang, S., Reade, J. and Burke, S.
Thesis/Report Department:School of Politics, Economics & International Relations
Identification Number/DOI:
Divisions:Arts, Humanities and Social Science > School of Politics, Economics and International Relations
ID Code:105470

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