ScienceDirect Publication: Finance Research Letters
Tue, 19 Nov 2019 12:01:19 GMT language
Publication date: Available online 18 November 2019
Source: Finance Research Letters
Author(s): Christina Christou, David Gabauer, Rangan Gupta
In this paper, we analyse the impact of uncertainty (corporate bond spread) shock on inflation rate, unemployment rate, monetary policy rate, and nominal exchange rate returns of the United Kingdom over the monthly period of 1855:01 to 2016:12. Given that we use data spanning over one and a half century, we use a time-varying parameter vector autoregressive (TVP-VAR) model. We find that a positive uncertainty shock reflects a negative demand shock as suggested by theory, and results in declines in the inflation, interest rate and dollar-pound exchange rate returns, and an increase in the unemployment rate. However, this impact varies over time, with the strongest effect observed for the period after World War II until the start of the Great Moderation, and during the recent global crisis. Our results are in general robust to an alternative econometric framework (breaks-based VAR) and a metric of uncertainty (stock market volatility).