Forecasting European Economic Policy Uncertainty

Abstract

Forecasting the economic policy uncertainty in Europe is of paramount importance given the on-going debt crisis and the Brexit vote. This paper evaluates monthly out-of-sample economic policy uncertainty index forecasts and examines whether ultra-high frequency information from asset market volatilities and global economic policy uncertainty can improve the forecasts relatively to the no-change forecast. The results show that the global economic policy uncertainty provides the highest predictive gains, followed by the European and US stock market volatilities. The results hold true even when we consider the directional accuracy.