Climate and economic policy uncertainty and the macroeconomy

Abstract

The paper examines the dynamics between economic and climate policy uncertainty and studies how these uncertainties affect the economy. Using quarterly US data from 1987Q2 to 2022Q2 and a vector autoregressive model, it highlights the importance of considering both types of policy uncertainty in policy- making processes. The findings also indicate that there is a negative relationship between policy uncertainty and investments suggesting that businesses and households become more cautious about their spending when they are uncertain about future economic conditions, governmental policies, or regulatory environments. Unemployment has varying effects depending on whether there is a shock on CPU or EPU, while the stock market is significantly affected only by a positive shock on economic policy uncertainty, implying that investors may be more risk conservative in uncertain environments. When inflation is included in the analysis, suggesting that the effects on prices vary depending on the shocks on the EPU and CPU. There is a negative relationship between EPU and inflation and a favourable relationship between CPU and inflation because of different policies, regulations, and expectations.