How does economic policy uncertainty react to oil price shocks? A multi-scale perspective

ABSTRACT

This paper provides evidence for the impact of oil price shocks on economic policy uncertainty (EPU) from a multi-scale perspective using discrete wavelet transform and VAR model. Results indicate that oil price shocks impose a positive effect on EPU at an original level while effects of oil price shocks on EPU are time-varying over different time-scales. Particularly, oil price shocks lead to a positive change in the trend of EPU in the short- and long-term. Whereas, in the medium term, the negative effect of oil price shocks on EPU is identified.

KEYWORDS:

• Oil price shocks
• economic policy uncertainty
• wavelet transform
• impulse response function

JEL CLASSIFICATION:

• C32
• E32
• F02

Acknowledgments

Supports from National Natural Science Foundation of China under Grant No. 71771206, No. 71425002, and President’s Youth Foundation of the Institutes of Science and Development, Chinese Academy of Sciences (Grant: Y7X1111Q01) are acknowledged.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ To measure policy uncertainty, (Baker, Bloom, & Davis, 2016) construct the index of economic policy uncertainty, which result from the weighted average of three uncertainty components. That is, articles refers to the policy-related economic uncertainty in newspaper coverage, the present value of future scheduled tax code expirations and future federal government purchases and consumer price index (CPI) levels.

² All of the time scales of EPU and oil prices are stationary at 1% significance level.

Additional information

Funding

This work was supported by the President’s Youth Foundation of the Institutes of Science and Development, Chinese Academy of Sciences [Y7X1111Q01];National Natural Science Foundation of China [No. 71771206,No. 71425002].