Policy uncertainty and the demand for money in the United Kingdom

Abstract

Limited studies that have assessed the impact of economic uncertainty on the demand for money have concentrated on using a volatility measure of money supply and output. Certainly, other factors such as regulation, taxes, budget deficits, national debt, etc. can contribute to an uncertain environment. This new measure of uncertainty, which is called ‘policy uncertainty’, is now constructed for several countries and published. We investigate the impact of this new measure on the demand for money in the UK and find that it has a negative and significant short-run effect, but not any log-run effects.

Keywords:

• The UK
• money demand
• policy uncertainty

JEL Classification:

• E41
• E40

Acknowledgements

The valuable comments of two anonymous referees are greatly appreciated. Any remaining error, however, is ours.

Notes

¹ See Friedman (1984, p. 399). Note that it is possible for nominal money supply to become endogenous, and changes in the nominal supply of money may very well reflect changes of the demand for money.

² Note that the level of significance used to arrive at this conclusion is at the 10% level.

³ The emerging countries included in Bahmani-Oskooee et al. (2013) were Armenia, Bulgaria, the Czech Republic, Hungary, Poland, Russia, Bolivia, South Africa, Colombia and Malaysia.

⁴ Examples of some other traditional studies related to other countries are Hafer and Jansen (1991), Hoffman and Rasche (1991), McNown and Wallace (1992) for the United States; Muscatelli and Papi (1990) for Italy; Miyao (1996) and Bahmani-Oskooee and Shabsigh (1996) for Japan; Von Hagen (1993) and Hansen and Kim (1995) for Germany; Bahmani-Oskooee et al. (1998) for Spain; Bahmani-Oskooee and Barry (2000) for Russia and Chowdhury (1997) for Thailand.

⁵ This new measure is constructed as an index by Economic Uncertainty Policy Group: http://www.policyuncertainty.com/europe_monthly.html

⁶ For other applications of this approach, see Bahmani-Oskooee et al. (2005), Bahmani-Oskooee and Hegerty (2007), Halicioglu (2007, 2013), Narayan et al. (2007), Tang (2007), Mohammadi et al. (2008), Wong and Tang (2008), De Vita and Kyaw (2008), Payne (2008), Bahmani-Oskooee and Gelan (2009), Bahmani and Kutan (2010), Dell’Anno and Halicioglu (2010), Chen and Chen (2012), Wong (2013) and Tayebi and Yazdani (2014).

⁷ Note that under Pesaran et al.’s (2001) bounds-testing approach, the variables could be a combination of I(0) and I(1). So, we had to make sure that there is no variable beyond I(1). Indeed, application of the ADF test revealed that all second-differenced variables are stationary. These are available upon request.

⁸ For the exact source, see the Appendix.

⁹ For the source, see note 2 in Table 1.