Does the Economic Policy Uncertainty Channel Impact the Influence of Expansionary Monetary Policy Changes on Output Dynamics?
Evidence shows that an elevated economic policy uncertainty shock slows down economic growth, which is consistent with the real option theory. In addition, evidence shows that low economic policy uncertainty amplifies the economic growth reaction to an unexpected cut in the repo rate. By contrast, the actual economic growth rises less than the counterfactual responses in the high economic policy uncertainty regime. From policy perspective, policymakers anticipating a certain magnitude of the impact from stimulatory policy shock should consider economic policy uncertainty regimes in their policy decisions; otherwise policy effects may fall short of their expectations and induce more uncertainty.
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