Economic policy uncertainty: Persistence and cross-country linkages

© 2021 The Author(s). This paper provides new evidence on the stochastic behaviour of the EPU (Economic Policy Uncertainty (EPU) index constructed by Baker et al. (2016) in six of the biggest economies (Canada, France, Japan, US, Ireland, and Sweden), and also on cross-country linkages, over the period from January 1985 to October 2019. For this purpose, it uses fractional integration/cointegration methods to measure the degree of persistence of the EPU and whether there exists a long-run equilibrium relationship linking the individual indices. This framework is much more general than the standard approaches based on the I(0)/I(1) dichotomy since it allows for fractional values of the integration/cointegration parameter and therefore does not impose restrictive assumptions on the dynamic behaviour of the individual series and their linkages. EPU is found to be in most cases a non-stationary, mean-reverting series which is characterised by long memory. Several breaks are also detected in each country. Finally, there is very little evidence of cross-country linkages. Our analysis provides fresh insights into the degree of persistence and the transmission of EPU shocks and has implications both for investors having to make risk management decisions and choose investment strategies and policymakers having to design effective macroeconomic policies