Synchronisation of Policy Related Uncertainty, Financial Stress and Economic Activity in the USA

This study analyses the synchronisation of economic activity, financial stress and uncertainty in the USA by employing a wavelet-based approach of cohesion. Being innovative in the choice of the methodological framework as well as underlying factors of interest, we employed the monthly data on the policy-related uncertainty indexes, Chicago Fed National Activity Index (CFNAI) and Kansas City Federal Reserve Financial Stress Index (KCFSI). Our key empirical findings suggest that the co-movements of policy uncertainty, financial stress and economic activity are frequencies as well as time-dependent. The uncertainty indices are found to be synchronised at lower and intermediate frequencies for all of the pairs. In the nexus between uncertainty and economic activity, financial stress plays a crucial role. Co-movement of the policy uncertainty is observed to be more pronounced during the crisis periods though at different frequencies which indicated the usefulness of the proposed framework to analyse the implications of contemporaneous policy uncertainty and financial stress for the real economy. Concomitantly this informs the policy efforts to address the financial and economic instabilities which may arise as a consequence of financial stress and policy uncertainty.