A Fresh Look at the Global Effects of US Economic Policy Uncertainty

This thesis investigates the impact of United States political pressures, quantified with the Economic Policy Uncertainty index, on domestic economic dynamics and global business cycles. With increasing geopolitical realignments, unstable negotiations between parties, and sudden policy realignments in the US, political uncertainty has emerged as an important determinant of macroeconomic performance. Leveraging a monthly panel dataset of the US EPU index, US industrial production, federal funds rate, Consumer Price Index, and Global Economic Conditions Indicator, we use a structural Vector Autoregressive (SVAR) model to investigate dynamic relationships and transmission mechanisms from the US to the global economy. The empirical evidence provides evidence that increases in US political uncertainty reduce domestic industrial output as well as international industrial output statistically, with substantial effects being realized within 3 to 6 months after an uncertainty shock. The federal funds rate is seen to exhibit a countercyclical response, with monetary authorities typically cutting interest rates to push the economy. Further, EPU shocks are revealed to reduce inflationary pressures as represented by the CPI, reflecting lower aggregate demand. Variance decomposition and impulse responses confirm the spillover of political shocks from the US to the rest of the international production cycle, with the US playing a leading role in transmitting uncertainty across geographical boundaries. This research contributes to the available literature on uncertainty and international macroeconomic interlinkages by demonstrating that political instability in the US can significantly influence world cyclical behavior. Policy implications refer to the need for more transparency and institutional stability in US policy-making because it has its disproportionate influence on the world economy.