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2019 | OriginalPaper | Chapter

26. Does the Economic Policy Uncertainty Channel Impact the Influence of Expansionary Monetary Policy Changes on Output Dynamics?

Authors : Eliphas Ndou, Thabo Mokoena

Published in: Inequality, Output-Inflation Trade-Off and Economic Policy Uncertainty

Publisher: Springer International Publishing

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Abstract

Evidence shows that an elevated economic policy uncertainty shock slows down economic growth, which is consistent with the real option theory. In addition, evidence shows that low economic policy uncertainty amplifies the economic growth reaction to an unexpected cut in the repo rate. By contrast, the actual economic growth rises less than the counterfactual responses in the high economic policy uncertainty regime. From policy perspective, policymakers anticipating a certain magnitude of the impact from stimulatory policy shock should consider economic policy uncertainty regimes in their policy decisions; otherwise policy effects may fall short of their expectations and induce more uncertainty.

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previous chapter Output and Policy Ineffectiveness Proposition: A Perspective from Single Regression Equations
next chapter How Does Inflation Impact the Effects of Expansionary Monetary Policy and Fiscal Policies on Real GDP Growth?
Footnotes
1
However, Bloom (2009) argues that these models predict that high uncertainty should be followed by a quick bust boom cycle. Evidence in Bloom (2009), based on using exogenous shock to changes in volatility, indicated the postponement of irreversible investment. This postponement leads to a fall in the current level of economic activity.
 
2
This is hinged on investment being reversible, firms operating in perfectly competitive markets and firms having long time span. All these conditions may lead uncertainty shock to enhance investment activity. The evidence supporting this growth enhancing effects of theory has been found in R&D intensive firms (Kraft et al. 2013; Stein and stone 2013).
 
3
This conclusion is consistent with, Aastveit et al. (2017) evidence that US monetary policy shocks affect economic activity less when uncertainty is high, in line with real option theory.
 
4
The expansionary monetary policy shock refers to a one standard deviation shock equivalent to 50 basis points cut in repo rate.
 
Literature
Aastveit, K. A., Natvik, G.J., & Sola, S. (2017). Economic uncertainty and the influence of monetary policy. Journal of International Money and Finance, 76, 50–67.
Baker, S. R., Bloom, N., & Davis, S. J. (2015). Measuring economic policy uncertainty (NBER Working Paper 21633).
Bernanke, B. S. (1983). Irreversibility, uncertainty, and cyclical investment. The Quarterly Journal of Economics, 98(1), 85–106.CrossRef
Dixit, A. K., Robert S. S., & Pindyck, R. S. (1994). Investment under uncertainty. Princeton, NJ: Princeton University Press.
Hlatshwayo, S., & Saxegaard, M. (2016). The consequences of policy uncertainty: Disconnects and dilutions in the South African real effective exchange rate-export relationship (International Monetary Fund Working Paper/16/113).
Kraft, H., Schwartz, E. S., & Weiss, F. (2013). Growth options and firm valuations (NBER Working Paper w18836).
Ndou, E., Gumata, N., & Ncube, M. (2017). Global economic uncertainties and exchange rate shocks, Transmission Channels to the South African Economy. Basingstoke: Palgrave Macmillan.
Stein, L. C. R., & Stone, E. C. (2013). The effect of uncertainty on investment, hiring and R&D: Casual evidence from equity options.
Metadata
Title
Does the Economic Policy Uncertainty Channel Impact the Influence of Expansionary Monetary Policy Changes on Output Dynamics?
Authors
Eliphas Ndou
Thabo Mokoena
Copyright Year
2019
Book
Inequality, Output-Inflation Trade-Off and Economic Policy Uncertainty

Print ISBN: 978-3-030-19802-2

Electronic ISBN: 978-3-030-19803-9

Copyright Year: 2019

DOI
https://doi.org/10.1007/978-3-030-19803-9_26