Economic policy uncertainty: The probability and duration of economic recessions in major European countries

Abstract

We study the impact of economic policy uncertainty on the probability and duration of economic recessions in 10 major European Union countries over the period 1987Q2-2021Q1. We find that economic policy uncertainty results in not only a higher probability of economic recessions but also longer recessions. Specifically, with a one-standard-deviation increase in the economic policy uncertainty index, on average the probability of an economic recession goes up by 14%, and the probability of an economic recession ending reduces by 27%, controlling for general economic uncertainty and economic and political factors. Moreover, we find that fiscal expansion, adequate political support, and left-wing governments’ policies are important to alleviate the effects of policy uncertainty on the likelihood of economic recessions.