Abstract:
This study examines the impact of Economic Policy Uncertainty (EPU) on the consumer
confidence index (CCI) in Pakistan. Using a sample from the start of 2012 up to February
2020, a vector error-correction model is used to gauge the impact of EPU on CCI. Our
results show that a shock to EPU in Pakistan affects CCI negatively and significantly.
The shock persists for a span of more than 20 forecast horizons, informing economic
policy makers in Pakistan that sudden changes in the stance without proper
communication can deteriorate consumer confidence. This is important as consumer
confidence in Pakistan accounts for not only the current economic situation, but expected
changes in key macroeconomic variables which is usually a key consideration when
forward-looking policies are devised. Our results remain robust to alternate Choleski
specifications and lag lengths in the model.
