Accounting for the Political Uncertainty Factor

Eric M. Scheffel

Research output: Journal PublicationArticlepeer-review

26 Citations (Scopus)


We build our analysis upon previous work by Bloom et al. (Measuring the Effect of Political Uncertainty. Working Paper, Stanford University, 2012) and Baker et al. (Political Uncertainty: A New Indicator. CentrePiece 2012; 16(3): 21–23), who estimate the dynamic effects of a shock to a newly constructed surrogate measure of political uncertainty (PU) on the US economy. Comparable to their results we demonstrate that a shock to PU has pervasive effects on the dynamic evolution of the US economy. Using an estimated structural dynamic factor model we find that more globally integrated markets exhibit significantly more pronounced responses than other measures of real economic activity. Impulse responses reveal a small but statistically significant ‘flight-to-safety’ effect, depressing government bond yields across the entire term structure following a shock to PU. Forecast error variance decompositions are predominantly composed of supply, demand, and PU shocks over all horizons, with PU shocks contributing less and supply shocks contributing more to forecast errors at longer horizons. Technology shocks, by contrast, are found to affect forecast accuracy closer to impact with quickly decaying contributions over extended forecast horizons.

Original languageEnglish
Pages (from-to)1048-1064
Number of pages17
JournalJournal of Applied Econometrics
Issue number6
Publication statusPublished - 1 Sept 2016

ASJC Scopus subject areas

  • Social Sciences (miscellaneous)
  • Economics and Econometrics


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