On the Link Between Policy Uncertainty and Domestic Production in G7 Countries: An Asymmetry Analysis

Abstract

Previous studies have assessed the impact of policy uncertainty on consumption and investment in G7 countries. In this study, we assess its impact on domestic output in the same countries. Furthermore, we argue that its impact could be asymmetric, implying that increased uncertainty affects domestic output at a different rate than decreased uncertainty. Unlike consumption and investment, we find the unanimous outcome in all G7 countries that increased uncertainty hurts domestic output and decreased uncertainty boosts it, though significant long-run asymmetric evidence was found only in the cases of Canada, Japan, and the U.S. Thus, any policy aimed at reducing uncertainty will be growth-enhancing.