2017年-ECB欧洲央行_Assessing_the_Decoupling_of_Economic_Policy_Uncertainty_and_Financial_Conditions_9页_142kb

Summary of "Special features: Assessing the decoupling of economic policy uncertainty and financial conditions"

Core Content

This special feature explores the divergence between economic policy uncertainty and financial conditions in the United Kingdom and the United States during 2016 and early 2017. It highlights how, despite significant increases in economic policy uncertainty following major political events, financial conditions remained stable or even improved.

Main Political Events and Their Impact

• UK referendum on EU membership (Brexit) and US presidential election in 2016 triggered sharp increases in economic policy uncertainty.
• The EPU index (Economic Policy Uncertainty index) rose substantially in both countries around these events.
• In the UK, uncertainty was linked to the nature of economic ties with the EU and political relations post-Brexit.
• In the US, uncertainty centered around trade, fiscal, and regulatory policies under the new administration.

Financial Conditions and Their Measures

• Financial conditions are defined as the ease of access to funding and the cost of risk.
• Key indicators of financial conditions include:
  • Corporate credit spreads
  • Equity valuations (measured by CAPE index)
  • Implied equity volatility (measured by VIX)
• These indicators are typically negatively correlated with measures of uncertainty, suggesting that higher uncertainty should lead to tighter financial conditions.

Empirical Findings

• Despite rising economic policy uncertainty, financial conditions remained benign in both the UK and the US.
• The global EPU index increased sharply in 2016, but the VIX remained at low levels, indicating lower market volatility.
• The US equity P/E ratio and UK CAPE index showed improvements, while credit spreads narrowed.
• Term premium and implied volatility also exhibited mixed but generally stable trends.

Structural Econometric Model

• A structural Bayesian vector autoregressive (S-BVAR) model was used to analyze the impact of different shocks on financial conditions.
• The model identified five types of shocks:
  • Economic policy uncertainty shocks
  • Aggregate demand and supply shocks
  • Monetary policy shocks
  • Idiosyncratic financial conditions shocks
• The results showed that economic policy uncertainty shocks had a tightening effect on financial conditions, but this was offset by positive demand shocks in the US and accommodative monetary policy in the UK.

Key Shocks and Their Effects

• US financial conditions were eased by:
  • A positive demand shock, reflected in monetary policy rate hikes, rising inflation expectations, and improving economic surprises.
  • The improvement in US business cycle indicators, which accelerated after the election.
• UK financial conditions were supported by:
  • Accommodative monetary policy from the Bank of England, including both conventional and unconventional measures.
  • A clear commitment to ease financial conditions if necessary.
• These responses helped mitigate the adverse effects of policy uncertainty on financial stability.

Broader Implications

• The findings suggest that economic policy uncertainty can have a significant negative impact on financial conditions.
• In the euro area, similar shocks could tighten financial conditions, increase risk premia, and raise debt sustainability concerns.
• The study is directly relevant to Risk 3 identified in this issue of the FSR, which relates to the risks posed by economic policy uncertainty to financial stability in the euro area.

Conclusion

The special feature concludes that while economic policy uncertainty can negatively affect financial conditions, its impact can be offset by positive demand shocks and accommodative monetary policy. The analysis underscores the importance of policy responses in maintaining financial stability, especially in the face of political uncertainty.