Policy uncertainty and the demand for money in the United Kingdom: Are the effects asymmetric?

Abstract

Since the publication of Baker et al. (2016) work on measuring economic policy uncertainty, its impact on other macro variables has received renewed attention and its impact on the demand for money is no exception. A previous study that assessed its impact on the demand for money in the U.K. found short-run but not long-run effects. We suspect that this could be due to assuming the effects of policy uncertainty to be symmetric. Once we assess its asymmetric effects by introducing the nonlinear adjustment of the policy uncertainty measure, we show that, both increased and decreased uncertainty, induce the public in the U.K. to hold more cash in the long run, a clear sign of an asymmetric response.