Library Dissertation Showcase

How does the economic policy uncertainty affect the real GDP growth in the UK?

  • Year of Publication:
  • 2022

The present study is an attempt to trace the effects of the UK’s economic policy uncertainty (EPU) on its economy. Quarterly data for the period 1997-2022 has been utilized for analysis. The macroeconomic indicator GDP growth is examined by applying exogenous shocks to it. The exogenous shocks are the economic policy uncertainty and a set of control variables that include government expenditure and unemployment rate. Based on the results of the Augmented Dickey-Fuller (ADF) test, all variables were found stationary at the first difference. Therefore, the Autoregressive Distributed Lag (ARDL) bounds test was chosen to check the long-run relationship while for the short-run analysis, the ARDL-based Error Correction Model (ECM) was applied. The empirical findings of the study suggested a short-run significant and negative impact of the EPU on the real GDP of the UK. Government expenditure and the unemployment rate affects the real GDP adversely in the short-run. There is no such evidence of the long-run relationship between EPU and real GDP was found. However, government expenditures enhance GDP growth while the unemployment rate reduces it significantly in the long run. The model is structurally stable as per CUSUM and CUSUMSQ plots plus there is no serial correlation or heteroscedasticity. The findings of the study are robust since the model has passed the required checks.

Keywords: Economic Policy Uncertainty; Real GDP; Short-Run; Long-Run; ADF Test; Stationarity; Serial Correlation; Control Variables, ARDL; ECM

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