Long-run co-variability between oil prices and economic policy uncertainty

Abstract

This study investigates the long run co-variability between prices of oil and uncertainty of economic policy by using monthly data for the period of 1998M1-2018M12. We develop an innovative approach based on long-run co-variability approach developed recently by Muller and Watson (Müller & Watson, 2018). Our empirical results reveal the positive long-run relationship between oil prices and uncertainty of economic policy for Australia, India, and Hong Kong whereas, a negative relationship is found between both variables in Brazil, China, Europe, Japan, Korea, Mexico, Russia, Sweden, and United States. We also find an insignificant effect of oil prices on uncertainty of economic policy in Chile, Colombia, Greece, Ireland, Netherland, and Singapore. This study extends the recent empirical findings on oil prices-economic policy uncertainty, which imply a differential influence of oil prices on uncertainty economic policy in sampled countries. From policy perspectives, results of this paper are helpful to policy makers with long-term concerns. They may guide the policy makers to identify the suitable policies to deal with substantial economic policy uncertainty and large oil prices shakes. In addition, they offer possibilities for drawing on the empirical evidence to deepen their understanding of dynamic relationship among oil prices and uncertainty of economic policy.