Of Votes and Viruses: The UK Economy and Economic Policy Uncertainty

25 Pages Posted: 8 Jun 2021 Last revised: 10 Aug 2021

See all articles by Michael Ellington

Michael Ellington

University of Liverpool

Marcin Michalski

University of Liverpool

Costas Milas

University of Liverpool

Date Written: August 10, 2021

Abstract

This paper examines the relation between GDP growth, Divisia money growth, CPI inflation, financial stress, and the United Kingdom's economic policy uncertainty in the context of its departure from the European Union. We employ two Bayesian VAR models which account for the extreme observations in macroeconomic and financial time series resulting from the COVID-19 pandemic outbreak. We document a contractionary effect of an economic policy uncertainty shock on GDP growth, which is not present in a model which does not account for the COVID-19-related outliers. Additionally, we find that GDP growth is enhanced by Divisia monetary stimulus but hampered by increases in financial stress. The results from a stochastic volatility in mean threshold model also uncover different dynamics of transmission of shocks between economic uncertainty and the indicators we study across high and low economic policy uncertainty regimes.

Keywords: Brexit, COVID-19, Economic Policy Uncertainty, VAR models

JEL Classification: E52, C30, C51

Suggested Citation

Ellington, Michael and Michalski, Marcin and Milas, Costas, Of Votes and Viruses: The UK Economy and Economic Policy Uncertainty (August 10, 2021). Available at SSRN: https://ssrn.com/abstract=3856682 or http://dx.doi.org/10.2139/ssrn.3856682

Michael Ellington

University of Liverpool ( email )

Chatham Street
Liverpool, L69 7ZA
United Kingdom

Marcin Michalski (Contact Author)

University of Liverpool ( email )

University of Liverpool Management School
Chatham Street
Liverpool, L69 7ZH
United Kingdom

Costas Milas

University of Liverpool ( email )

Chatham Street
Liverpool
United Kingdom

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